Knowing where to invest your savings can be a bit of a headache; you’ll want a good return on your investment but many people don’t want to invest in anything too risky. And while it is often the case that the best returns are made on those investments that carry slightly more risk, there are some savings vehicles and investment options that offer a good return with minimal risk.
A cash ISA is a good way to give your savings pot a much needed boost as any interest you make on your invest is yours to keep without any interference from the tax man. However, there is only so much money that you are allowed to invest in an ISA in any given tax year and the cash ISA allowance from now until April 5 2013 is £5,640.
Once you have invested this amount you can then transfer it into another ISA account the following tax year and build up your tax free and risk free savings pot. To make the most of a cash ISA it is important that you keep your money invested for as long as possible and dip into non-ISA cash savings first. Once you take money out of an ISA you lose the tax-break on it.
National savings and Investments certificates and gilts
Another low risk and tax-free investment option is the National Savings and Investments (NS&I) certificates. A certain number of issues are made available each year and you can invest up to £15,000 and if you choose an index-linked savings certificate then your investment is even safe from rising inflation.
You can also invest in British government stocks of gilts and these usually pay interest twice a year plus the nominal value of the stock once it matures, which could be over ten years after you made the initial investment. You can sell them before this redemption date but your return will be less certain.
If you have any surplus funds in your current account at the end of each month then you should consider moving it to a savings account. But it is important that you choose the right account for your needs.
For instance, if you feel that you may need to access your money and withdraw it at short notice then you’ll want an instant or easy access account that does not charge you for taking money out. This is the best option if your savings are for an emergency fund but they do not offer great returns on your investment.
The savings accounts that offer the better rates of interest are often those that require a notice period, of anything from 30 to 90 days, before you can make a withdrawal or those that require you to have your money tied up for a number of years. These accounts will often charge a penalty fee or lower the interest rate if withdrawals are made. However, some will offer a certain number of penalty-free withdrawals each year.
There is obviously a slight risk that the bank or building society your money is held with could go bust. However, if it is a UK institution that is registered with the Financial Services Authority, the first £85,000 held with an individual institution is totally protected under the terms of the Financial Services Compensation Scheme. If you have more than this in cash savings it is possible to keep it all safe by spreading it around so that it is kept in accounts from different organisations.
Under the mattress
You may think that the only risk to hoarding your money under the mattress will come from burglars or a house fire but, because your cash will not be earning any interest, it will slowly but surely be eroded by inflation and so is arguably the most risky savings strategy of all.