Money Mondays: Your guide to investing, whatever your budget

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Natasha Preskey
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Money Mondays is your go-to guide for all the information you need to manage your finances. For this week’s Independent Woman’s Bank Account column, we asked an investment expert how to make the most of your savings. 

If you’ve started squirrelling away cash for a rainy day – well done you. However, as so many Cash Individual Savings Accounts (ISAs) only offer teeny tiny rates of interest, investing some of that money could be an even better way to plan for the future.

Cash ISAs are just accounts to deposit your savings tax-free, while stocks and shares ISAs allow you to invest your money in government and corporate bonds as well as company shares, unit trusts and open-ended and investment trusts (OEICs). Remember, though, that the amount you can put in can go down as well as up if the value of your investments decreases.

Here, Maike Currie, the investment director at Fidelity International, decodes the world of ISAs and SIPPs and breaks down which plan could suit the amount of cash you have spare.

Here are the options for your annual budget:

Budget: Under £1000

Just swapping Pret for leftovers a couple of times per week could free up enough cash to start investing. To set up a stocks & shares ISA, you can start with as little as £50 a month as part of a regular investing plan. 

Start by picking an ISA provider - Fidelity International, Hargreaves Lansdown and AJ Bell are all worth checking out. Next, choose investments to hold within the stocks and shares ISA.

If you don’t know where to start, you can opt for a ‘ready-made’, low-maintenance option like a multi-asset fund. These do the job of choosing the right mix of investments for you - having a range helps spread the risk of losing your cash. 

Budget: £1,000 - £5,000

With a slightly larger budget, you can cash in on the government’s lucrative Lifetime ISA. When you pay in, the government gives you a huge bonus that trumps any Cash ISA interest rate. The catch? The money can only be used either to buy a house or for retirement after age 60.

Here’s how it works: you can pay in up to £4,000 per financial year and the government gives you a bonus worth 25% of contributions at the end of the year. The money can be held in cash or in stocks and shares, as with standard ISAs. Anyone aged between 18 and 40 can take out a Lifetime ISA and can claim the bonus until they reach age 50.

If the money is used for any other reason other than those stated above, a 25% penalty is taken from the total balance before you get it back.

So, £4,000 paid in over a year is eligible for a £1,000 bonus, taking the balance to £5,000. But watch out - if the penalty is then applied, 25% of £5,000 is taken (£1,250), leaving you with £3,750 - £250 less than you paid in.

Lifetime ISAs can be a great option if you’re self-employed and don’t have access to a workplace pension. However, to avoid losing cash, you need to be sure you won’t need to dip in the day before pay day Friday. 

Budget: over £5,000     

If you have more money to play with, it’s worth deciding whether to stash in an ISA, a pension like a self-invested personal pension (SIPP) or both.

Each tax year you can put £40,000 into an SIPP and £20,000 into an ISA. Both allow your cash to grow free of UK income and capital gains tax. But, when it comes to tax efficiency, SIPPs have an edge over ISAs.

While money that goes into an ISA has already lost a slice to income tax, when you contribute to a SIPP from your earnings you receive a tax relief upfront from the government. So if you’re paying 40% tax, then you can put £1,000 contribution into your SIPP with only £600 of already-taxed income.

On the flipside, ISAs are more flexible - there are strict rules on what you can do with your pension pot, when and how much you can withdraw from it. With a SIPP you can’t access your savings until you reach pension age – currently 55.  

Illustration: Samad Jble

Other images: Getty