Is it time to invest your cash savings?
By Chiara Cavaglieri
Article 2 of 4
Is it time to invest your cash savings?
Should you keep your money in a savings account or invest it in stocks and shares, peer-to-peer lending or buy-to-let? Discover the pros and cons of each option.
Savers have been frustrated by ultra-low interest rates for almost a decade, but a standard savings account isn't the only option.
Here we summarise some of the alternatives, from stock market investments to buy-to-let property.
Are you ready to invest?
You'll usually pay considerably more interest on credit card balances and loans than you'll earn by saving, so prioritise clearing debts first.
Once you have a handle on your borrowing, aim to build up an emergency fund of core savings that would cover all of your expenses for at least three months, and keep this money in an easily accessible savings or bank account.
- Compare instant-access savings accounts with Which? Money Compare
Stocks and shares
If you have a long-term strategy – at least five years – and can stomach potentially losing capital, it could be time to invest in the stock market.
Buying shares in companies that you think will rise in value is one way to do this. Alternatively, you can put your money into investment funds and trusts. A fund manager can pick shares for you, or you can choose a 'passive' tracker fund that follows a particular index such as the FTSE 100.
Investments held in a stocks and shares Isa are free from capital gains tax and income tax. You can transfer money from a cash Isa to a stocks and shares Isa without losing the tax benefits, and vice versa.
Unlike cash held in a savings account, money invested in stocks and shares is not protected so you could lose money. Create a balanced portfolio invested across different asset classes (such as cash, bonds, equities and commercial property) if you want to spread risk and avoid overexposure.
Find out more: the beginner's guide to investment – are you ready to invest?
Social lending via peer-to-peer platforms
Peer-to-peer lending cuts out the banks and lets you lend out your money in return for higher rates.
Platforms such as Zopa and Rate Setter enable individuals to borrow and lend to each other, while Funding Circle lets individuals lend to small businesses.
Changes introduced in April 2016 mean that you can now invest in peer-to-peer lending through an innovative finance Isa, which means you don't pay tax on any interest (up to your annual Isa allowance). However, it may be some time before all of the major peer-to-peer providers have full approval from the financial regulator to be able to make these products available.
Peer-to-peer lending websites are regulated but they aren't covered by the Financial Services Compensation Scheme (FSCS), so your savings are at risk if the website goes bust.
Find out more: peer-to-peer lending – we review the most popular companies
Bricks and mortar are another alternative to cash savings. Buy-to-let property can generate a regular income as well as capital appreciation, although this is not without considerable risk.
Property is an illiquid investment, which means it cannot be sold quickly, so you should be prepared to invest for the long term. You will also need a larger deposit than you would for a residential property, buy-to-let stamp duty is subject to a 3% surcharge and you'll have to pay higher interest rates on a buy-to-let mortgage.
Don't forget to factor in the cost of repairs, maintenance, and void periods (when you have no tenants and will have to cover the mortgage yourself). If you don't have the time to communicate with tenants and handle maintenance/repairs requests yourself you will also have to hand over around 15% of your rental income to a managing agent.
Currently, landlords can offset the cost of their mortgage against their profits at their marginal rate of tax, which means higher-rate taxpayers can claim 40% tax relief, while top-rate taxpayers can claim 45%. By 2021, this will be restricted to a flat rate of 20%.
Landlords who currently pay basic-rate tax will see no change, but higher and additional rate taxpayers will be worse off. This change will be phased in over four years, from April 2017.
Find out more: becoming a landlord – what you need to bear in mind before taking the plunge
- Last updated: October 2016
- Updated by: Chiara Cavaglieri