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How could you invest £2,500 pounds in the UK in 2021

Jul 29, 2021 | Investing

With £2,500 in a savings account earning practically zero interest in UK banks, today may be a good day to look for investment opportunities.

There are of many ways to wisely invest £2,500. A stocks and shares ISA, Premium Bonds, regular ISA, or just stocks and shares, are some of the most common ways.

If you are new to the world of investing you aren’t alone. The final salary pension schemes of the past, that helped future generations retire comfortably, have all but disappeared.

 

Interactive Investor is a good easy way to open a Stocks and Shares ISA with £2,500! – they’ve just won the Best Low Cost ISA 2021 Boring Money Award – check them out here

 

The UK Government’s implementation of employer assisted pension schemes have helped. These will help to keep pensioners when they reach retirement, but this will need to be propped by your own additional efforts.

Investing tomorrow is harder than investing from today, and far harder starting next year!

There’s always a good reason not to start, but until you do you can’t start to feel the benefits of compound interest.

30 is now average the age in which a person, or couple, manage to save enough for a deposit on their first home. The equity in an average home at time of retirement in the future may not be as lucrative as it once was for our parents and grandparents – which again means less money in our retirement.

If investing is something you are considering, here are some of the popular options out there to invest your £2,500.

 

 

What should you do if you have £2,000 to invest in 2021?

Ten years ago, an average UK savings account gave interest rates of around 3%-6% interest. Whether you managed to achieve 3% or 6% was dependent on the amount you invested.

It’s amazing and worrying how times have changed. 6% was considered the standard for so long a period of time, and now even 0.6% can’t be found!

High street bank accounts offer around 0.1% interest per year as of today.

That means a £2,500 investment on January 1st is worth, on 31st December, a disheartening £10,002.50!

Just £2.50 passive income a year in a year with a £2,500 investment. Even the usual magical and mystical compound interest can’t wave its magic wand for you this time.

It was a commonly perception, that even just a decade ago, that winning £1million on the lottery could mean you put the cash in a high interest savings account, and you could live off the interest.

10 years ago, this would have given you £60,000 per year. A nice annual return. Today, it would be closer to just £1,000 per year in interest. Yes, that is an incredible £59,000 a year less in interest payments than someone would have earned a decade ago.

How things have changed!

Your £2,500 investment in Year 1 would be worth £2,525.11 in 10 years-time. A total passive income earning of £25.11 in 10 years.

We will need to find better ways to invest our £2,500.

 

 

Stocks and Shares ISA

ISA’s have been around for a several years now. The UK Government’s ISA scheme is a tax free way of saving money for the first £20,000 per annum you invest (this is the current 2020-2021 rate).

Further Information: -> Government’s Guide to ISA’s 2021

There are different types of ISAs on the market today. These are available from banks and other investment companies.

ISA simply stands for Individual Savings Account.

The UK law states you, of course, an individual needs to pay tax on any earnings. It doesn’t matter of those earnings come from employment, self-employment or investing. You can invest up to £20,000 per year within an ISA and not pay tax on any earnings made.

A stocks and shares ISA – through a good company such as Interactive Investor – is one way to invest your £2,500. This should, in theory and on average, bring better returns than just placing it into a regular savings account.

ISA service providers charge a small service fee to manage your ISA account. It’s relatively low cost and means you can leave it to the experts. This service fee pays for the ISA service providers portfolio managers who will take care of your ISA as part of a larger investment portfolio.

Service fees from these service providers are often around 0.5%-0.75% of your overall investment, which means for a £2,500 investment you would pay between £12.50 and £18.75 in service fees. Fees are usually deducted from any earnings within your ISA account.

An initial investment of £2,500 with a financial investment company, who pays on average 5.5% per annum, after one year your investment would be worth £2,637.50. You would earn £137.50 income.

Although it doesn’t sound a lot, it is a sizeably bigger return than the £2.50 from a savings account.

Of course, investment carries risk, and you may not earn back as much as you put in.

It becomes even more enticing though when we look at the earnings for year two and beyond as the compound interest steps in and begins to work its magic.

After ten years your investment would have grown to £4,270.36. A total income of £1,770.36. A considerably larger passive income and return on investment than the £25.11 in a standard savings account.

If, today, you setup a Stocks and Shares ISA with your initial £2,500 investment, could add £1,666 per month to your plan (so the maximum £20,000 per year) and used the same investment company with an average return of 5.5% per annum – what could you earn?

After ten years your investment would be worth £268,100.44. Your contribution to your investment would be £199,920.00 and therefore your income would be £65,680.44.

Start this plan at the age of 25 and at the predicted UK retirement age (67) your investment would be worth £1,850,657.83. Your contribution would be £413,200 and passive income would be £1,437,457.83.

 

Remember rates are not guaranteed and you could end up with less money than you invested.

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