The last decade has been a tough one for UK savers. Rock bottom interest rates have made it hard for them to get any decent returns on their money. Furthermore, inflation is currently out of control, with the Office for National Statistics (ONS) reporting that it has now reached 6.2%. This high rate of inflation, combined with the low-interest-rate environment, means that people with cash savings risk seeing their money lose value.
Fortunately, there is a way for savers to safeguard their money against inflation. This is through a stocks and shares ISA. So, how exactly can a stocks and shares ISA help you beat inflation levels? Read on to find out.
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What is a stocks and shares ISA?
A stocks and shares ISA is a tax-efficient account that lets you invest in a wide variety of investment products, including shares, investment funds and trusts.
The primary advantage of a stocks and shares ISA is that any capital gains, dividends, or interest earned from your investments are tax-free.
There is, however, a limit to how much you can put in a stocks and shares ISA annually. This is known as the ISA allowance. For the current tax year, this allowance is £20,000.
How can a stocks and shares ISA help you beat inflation levels?
According to Saxo Markets, a stocks and shares ISA can help protect your money from the effects of inflation in two ways.
First, by investing in a stocks and shares ISA, you avoid being locked into any fixed interest rates, which is typically what happens when you put your money in a cash ISA, for example.
Simply put, the amount of returns from a stocks and shares ISA are not based on a fixed rate, but rather on how your investments perform and how much they are worth when you sell them.
If your investments perform well, there’s a chance that you could get inflation-beating returns. Indeed, over the long term, returns from investments have historically outperformed cash savings as well as inflation.
Second, investing in an ISA means that you have no tax to pay on any gains, dividends and interest from your investments. Basically, you get to keep more of your money.
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Is there a flipside?
Yes, there is, unfortunately.
With a cash ISA or a traditional savings account, your money is secure. You cannot lose it, though its value may be eroded if the interest you get is less than the rate of inflation.
Sadly, there is no such security with a stocks and shares ISA. Your investments may fluctuate due to adverse market conditions. You may actually get back less than you initially invest, particularly in the short term.
That’s why with a stocks and shares ISA, it’s best to leave your money invested for a number of years. A good rule of thumb is to invest for at least five years. This will allow your investments to ride out any market downturns.
You can also mitigate the risk of loss by making sure that your portfolio is well diversified. This entails investing across different sectors and countries, as well as different investment assets.
It’s highly unlikely that all sectors, countries or investment assets will perform poorly at the same time. If one category incurs losses, these losses will be offset by gains in another category. This will reduce the overall risk of your portfolio underperforming or losing money.
How can you open a stocks and shares ISA?
Stocks and shares ISAs are available from a vast array of providers. These include banks, building societies, stockbrokers and fund management companies.
Every provider has its own pros and cons. Therefore, make sure you compare different options first to find out the most suitable one for your needs and circumstances. To help you with this task, The Motley Fool has compiled a list of some of the top-rated stocks and shares ISA providers in the UK right now.
As always, before you put your money into any investment, make sure you thoroughly research it to see if it has good long-term potential.
If you don’t have the time or the inclination to research your own investments, you can always sign up with a top-rated robo-advisor that will create a personalised stocks and shares ISA portfolio for you based on your preferences and risk tolerance.
