Knowing what to do with your savings is often far from straightforward. Leaving money in a bank or building society savings account can feel reassuring. The balance is easy to understand, your money does not fluctuate with the stock market and, depending on the account, you may be able to access it quickly if you need it.
For money you expect to need soon, that predictability can be important. But when savings are intended for a goal that could be many years away, is leaving everything in savings accounts the only option?
That is where Stocks and Shares ISAs enter the conversation. They provide a tax-efficient way to invest for the longer term, although they come with risks that ordinary savings accounts do not.
Why are people looking beyond savings accounts?
Savings accounts can be very handy for emergencies, planned purchases and money that may be needed at short notice. Depending on the account, savers can also earn interest without exposing their money to movements in investment markets.
The difficulty is that inflation can quietly reduce what those savings will buy. If prices rise faster than the interest earned, an account balance may increase while its spending power falls. The number looks healthier on paper, or on a laptop screen, but in real terms it may not be.
This does not make savings accounts a bad choice. It simply means that saving and investing perform different jobs. Cash-based savings offer relative stability and access, while investing offers the possibility of greater long-term growth in exchange for accepting uncertainty and the possibility of loss.
Greater access to online investment services has also made investing easier to explore. Information, account comparisons and investment choices are now readily available online, although easier access should not be confused with an easier decision. A polished app cannot remove investment risk, however cheerful its buttons may look or user-friendly it may feel.
What is a Stocks and Shares ISA?
A Stocks and Shares ISA is not an investment in itself. It is a tax-efficient account, sometimes described as a “wrapper”, that can hold eligible investments such as funds, company shares and bonds.
One attraction is its tax treatment. Under current ISA rules, you do not pay UK tax on income or capital gains from investments held inside the account. The government sets the rules governing ISAs, including how much can be paid into them, and explains them on GOV.UK.
The tax treatment is one reason people may consider an ISA when investing for a long-term goal. Returns can remain within the account without creating the same UK Income Tax or Capital Gains Tax considerations that may apply to investments held outside an ISA.
The wrapper does not improve the performance of the investments inside it, however. It cannot guarantee growth or prevent losses. Your capital is at risk: the value of investments can fall as well as rise, and you may get back less than you invest.
Savings accounts and investing serve different purposes
Bank and building society savings accounts have several practical advantages. With a fixed-rate savings account, the interest rate is agreed for a set term, although access may be restricted or early withdrawals may carry a penalty. Easy-access accounts offer greater flexibility, but their interest rates can change.
In either case, the account balance does not move up and down with investment markets. This can make a savings account more appropriate for unexpected expenses, nearer-term plans or goals with a firm date attached.
Investments behave differently. Their value can rise and fall according to the assets chosen and market conditions. They offer the possibility of higher returns than savings accounts over the longer term, but not the promise.
A temporary fall can become a realised loss if the investment must be sold while its value is down. This is why the purpose of the money matters. Funds required for next year’s boiler replacement, or that holiday in the Bahamas you have always wanted, have a rather different job from money being accumulated for retirement in twenty years.
Why does the timescale matter?
A longer investment period may provide more opportunity to ride out fluctuations in the market. If values fall, there may be time for them to recover before the money is needed.
There is no guarantee that they will recover, however, or that an investment will produce a positive return, even over many years. Past performance is not a reliable guide to future results.
Before investing, it therefore makes sense to consider not only how long the money could remain invested but also how flexible the goal is. Someone who can delay a withdrawal may be in a different position from someone who must access the full amount on a particular date.
What can be held in the account?
Depending on the provider, a Stocks and Shares ISA may offer access to individual company shares, investment funds, exchange-traded funds and bonds.
You do not have to put all your eggs in one basket, either. Funds can provide exposure to a collection of investments rather than relying on the fortunes of one company. Holding a mixture of assets, markets or sectors is commonly known as diversification. This can help spread risk, although it cannot eliminate the possibility of loss.
The available choice varies between providers. Some accounts offer a relatively small selection of ready-made funds, while others provide access to a much broader investment range. Less can sometimes be more, especially if an investor is left staring at a sea of possibilities while quietly longing for the days of a biscuit tin hidden at the back of a kitchen cupboard.
The important point is to understand what the account contains rather than assuming that all Stocks and Shares ISAs work in exactly the same way.
Questions to consider before investing
Before choosing an account, it may help to ask:
- When am I likely to need this money?
- How flexible is that date?
- Do I already have accessible savings for emergencies?
- Could I afford for the investment to fall without disrupting my plans?
- Do I understand what I would be investing in?
- What account, dealing and investment charges apply?
- Would I prefer to make regular contributions or invest a lump sum?
- How easily could I access or manage the account if my circumstances changed?
There is no one-size-fits-all answer. Someone may reasonably keep one pot in an accessible savings account while investing another for a more distant objective.
Comparing Stocks and Shares ISA providers
Just as investors have different requirements, providers of a Stocks and Shares ISA offer different investment selections, minimum contribution levels, account features and charges.
Costs may include platform or account fees, dealing charges, foreign-exchange costs and fees attached to particular funds. Even apparently modest charges can build up over time and affect returns, so it is worth understanding both what is charged and when.
Other considerations may include whether the account supports regular investing, how easy it is to research and manage investments, and what arrangements apply to withdrawals or transfers. These are practical differences rather than minor decoration. An account should be understandable and manageable as well as competitively priced.
Putting long-term money to work
The interest in Stocks and Shares ISAs is understandable. Inflation can weaken the spending power of money held in savings accounts, online investing has become more accessible, and the ISA structure offers a tax-efficient home for eligible investments.
None of that makes investing automatically preferable to saving. Savings accounts provide predictability and accessibility that investments cannot promise, while investing introduces the possibility of both growth and loss.
The most useful starting point is not to ask which option is “best”, but what each portion of your money needs to accomplish. Once its purpose, timescale and acceptable level of risk are clear, the available choices become rather easier to navigate, even if the markets themselves seem determined to keep everyone guessing.
