Make sure you understand the differences between saving and investing
Make sure you have money you can access easily
It’s important to make sure you have easy access to enough savings to cover any emergencies or unexpected bills. So if you have any unforeseen expenditure you can pay for it with this money.
Be sure you are ready to invest
Here are some things you should consider,
- If you have any outstanding debts, investments are unlikely to outperform the interest you’re paying on them so have you thought about repaying or reducing these first?
- Have you protected yourself and your family against any unforeseen events?
- How much do you want to put away and how long for, taking into account any existing commitments or planned expenses?
- Do you have a particular goal in mind that you want to invest for?
- Have you recently received some money or have some savings that you’ve not touched for a while?
Investing is for the medium to long term
When you invest for the medium to long term it gives you the opportunity to minimise the short-term fluctuations in the markets. If you haven’t invested in a fixed term product, you can take some or all of your money out at any time, though you may get back less than you originally invested. Although the value of your investment isn’t guaranteed, your money will have the potential to grow more than what you'd earn in interest from a savings account over the longer term.
Are you prepared to take some level of risk with your money
Investing can be monthly as well as a lump sum
Deciding on whether you invest monthly or as a lump sum will depend on your personal circumstances and also what you are investing for. Investing can help you achieve your long term goals, for example: helping your child in the future with university fees or a deposit for a house. These could be regular monthly contributions, whereas if you have a lump sum to invest you could use it to provide an additional income in retirement to supplement a pension.
There are different tax treatments when you save and invest
The money you invest may be subject to income tax and capital gains tax. There might be allowances that you can use, however the money you get back depends on different tax treatments and your own personal circumstances.
Personal Savings allowance
When money is placed in non-ISA savings or current accounts, the interest paid is now paid gross with no tax deducted. The Personal Savings Allowance means that most people will no longer need to pay tax on their interest.
- If you’re a basic rate (20%) tax payer, the first £1,000 of non-ISA interest per tax year will be tax-free.
- If you’re a higher rate (40%) tax payer, the first £500 of non-ISA interest per tax year will be tax-free.
- Additional rate (45%) tax payers don’t qualify for the Personal Savings Allowance.
Individual Savings Accounts
ISAs were introduced by the government as a tax efficient way of saving or investing. If you save in a Cash ISA you don’t pay any tax on the interest you earn. If you invest in a Stocks & Shares ISA you don’t pay tax on any income tax or capital gains tax on any income you receive from your investment. The favourable tax treatment of ISAs may change in the future.
Capital Gains Tax
Capital Gains Tax is a tax on the profit or gain you make when you sell or ‘dispose of’ an asset when you cash in an investment (excluding a Stocks and Shares ISA). You have an allowance each tax year and you would be liable for tax if you exceed this. However, this will depend on your individual circumstances.
If you’re unsure about how your individual circumstances affect the tax that you should pay you should seek independent financial advice.
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