If you’re young and you want to build your wealth, a stocks and shares individual savings account (Isa) is a smart way to save.
The new Isa limit from 1 July means you can save up to £15,000 a year without having to pay any interest on your returns. Thanks to the power of compounding, over the years, this will make your money grow considerably faster.
You probably have loads of things you want to save up for in the future, and the handy thing about Isas, is that you can use them to save up for practically anything. Here we outline how to use your Isa to achieve some of the main financial goals for savers in their 20s and 30s.
Build an emergency fund
Before you even think about investing you need to have an emergency cash fund so that unforeseen costs don’t pose such a major threat to you. This should be money you don't touch unless you really need it for something important. Financial planners recommend you should build your emergency fund to a minimum of three to six months’ salary in size. Isas are the ideal savings vehicle for building an emergency fund. Make sure you get an instant access Isa so you can get at your money quickly, and use price comparison websites like Moneyfacts.co.uk to find the best interest rate. NS&I offers an online instant access cash Isa that pays 1.5 per cent interest and is totally secure, being backed by the UK government.
Save for a house
Isas are also a useful savings tool if you’re building up a house deposit. One of the best features of the new Isas if you’re saving for a deposit is that you can switch your investments into cash and vice versa, as you wish. This is useful, because if you’re within a few months of the point of buying your own place, you will need to switch your investments into cash so you can quickly hand your deposit over when the time comes.
Investing to buy a house can be a smart move because you can build money faster than cash, and a stocks & shares Isa will give you access to a wide range of investments. But investing also means you have potential to lose money over the short term. So, depending on how far off buying you are, you need to be careful to take an appropriate level of risk in your portfolio. Gradually moving your money into cash, or into some less volatile investments as you get closer to buying is a good way to manage this.
One way to save for a house deposit is to pick an investment that will move in line with UK house prices. For example, there’s a residential property unit trust run called the TM Hearthstone UK Residential Property Fund (www.hearthstone.co.uk). Alternatively, Castle Trust’s Housa fund is intended to track house prices (www.castletrust.co.uk) and can be held within an Isa.
If you have five to 10 years (it takes most people at least this amount of time to save up) then you should choose funds that aim to preserve your wealth. If you have a lump sum to invest, the Personal Assets Trust (PNL), one of the IC's Top 100 Funds, is a global investment trust that has been very successful at limiting downside risk. It aims to protect and increase shareholders' funds over the long term and uses the FTSE All-Share index as its benchmark. It is trading on a 0.98 per cent discount so could be a good place to start looking.
But if you are investing on a regular monthly basis, funds can be a cheaper option than investment trusts as you won't have to pay dealing charges. We like Invesco Perpetual’s Distribution Fund (ISIN: GB00B1W7J089), which also features on our Top 100 list. It aims to achieve a balance of income and capital growth through a portfolio of primarily UK equity and fixed-interest securities.
Start your own pension
If your company doesn’t offer you a pension scheme yet, it will soon thanks to a government policy called automatic enrolment, where every employer in the UK will have to provide pensions to staff. But if you’re eager to get started, or you’re worried that your company pension won’t be enough, you can use your Isa allowance to start a retirement fund.
If you’re in your 20s or 30s now, the chances are you’ll have at least another 30 to 50 years before you’ll be thinking about retiring. This is a long time horizon, which means that you can afford to take a high level of risk. Some Emerging Markets exposure will boost your portfolio’s risk - have a look at Lazard’s Emerging Markets Fund (ISIN: GB00B24F1P65). It could be considered a safe pair of hands in a volatile, high-risk/high-reward sector. It is likely to focus on, but not be limited to, Latin America, the Pacific Basin and Europe, and could make a good long-term investment.
For more ideas on how to invest for every stage of life, check out our Young Money guides.
