£5,000 to invest right now in the UK can help see a nice return in the future.
If you are one of those people who managed to put aside a little something during lockdown and have found a savings pot earning zero interest with the UK banks, this article may help you decide how to invest your nest egg.
Interest rate earnings through the high street UK banks are no more. Many banks no longer offer saving interest rates, and even premium accounts offering just 0.25% p.a. Years ago you could almost live off the interest on a million pound savings account, today it will earn you just £208.33 per month.
Saving for the future isn’t optional anymore. It’s more important than ever to invest in your future – and £5,000, or £5,000 a month, would see you off to a great start!
Interactive Investor is a good easy way to open a Stocks and Shares ISA – they’ve just won the Best Low Cost ISA 2021 Boring Money Award – check them out here
What should you do if you have £5000 to invest in 2021?
Our parents and grandparents told us to save. Many of us grew up with saving accounts, some of which had as high an interest rate of 6% – if only those days were here again!
As of today, the average UK current bank account is offering just 0.1% interest per year on your savings. Yes, that is a tenth of 1%!
If you decide to invest £5,000 on January 1st, by the end of the year your hard earned £5,000 is now worth £5,005!
Your passive income method has brought you in an income of £5 in a year. As discouraging as this is, it becomes even worse when you realise that’s just 42p per month.
If all things remained the same, in 10 years-time your investment would be worth £5,050.22.
Congratulations, your £5,000 nest egg brought you an income of £50.22 over ten long years.
We of course need to find some better ways to invest our £5,000.
Stocks and Shares ISA
ISA’s were first introduced in 1999. The Cash ISA replaced the old TESSA’s and the Stocks and Shares ISA replaced the PEPs.
As the awareness and concept of ISAs have spread over the years, in part thanks to the internet and in part due to UK Government and bank promotional campaigns, there has been a dramatic rise in the number of people holding one.
The tax free way of investing ensures you do not pay any tax on the income from the first £20,000 invested into an ISA account – which includes both a Cash ISA and a Stocks and Shares ISA.
The latter we are going to discuss here.
Although ISA investing isn’t a new concept, it is something that has a lot of traction in recent years. As more banks, and more Government messages are released, encouraging us to invest for our futures, the demand for this Government initiated method of tax free saving increased.
Saving into an ISA means you will not pay any tax on any earnings from the first £20,000 per annum you invest (this is the current 2021-2022 rate).
Further Information: -> Government’s Guide to ISA’s 2021
There are many different Stocks and Share ISA accounts on the market offered by banks and investment companies.
An ISA simply stands for Individual Savings Account.
Perhaps not the most imaginative name, but it does the job.
The income law, stipulated by the UK Government, says that you must pay tax on any earnings you receive. This can be any earnings through any method such as employment, self-employment, investment income, a second job etc… There is of course before your own personal allowance, where no tax is payable up to a certain value (currently £12,570).
The various stocks and share ISA’s on offer is just one of the ways to invest your £5,000. In theory investing in stocks and shares, using the various indexes, should see you with an income from your investment, but of course this is never guaranteed.
An ISA works by opening an account with your chosen bank or investment company. The process is usually straightforward and usually you can decide how big a part you wish to play in how your money is invested.
For most, particularly those unfamiliar with the markets, the majority of ISA offering companies have a risk rating allowing you to choose to play it safe, take a medium risk for more modest gains or take high risk to potentially see a larger increase to your investment.
The company you open an ISA with will charge you a small management fee for investing and managing your account on your behalf. They of course do this at scale, which enables them to do so at a relatively low fee – usually around 0.5%-0.75%, but this can depend on the amount invested
An initial investment of £5,000 with an ISA company, who pays on average 6% per annum, will see your investment – after one year – worth £5,300 and means you would have a £300 tax free income.
These are the types of interest rates banks would have given to a £5,000 investment in a regular risk free savings account, but times have changed.
Although £300 return may not look very interesting on paper, as soon as you start combining this with the magic of compound interest, the results really start to work in your favour.
After ten years, all other things being equal, your investment would have increased to £8,954.23. A total tax free investment income of £3,954.23. Compare this to the £50.22 earnings from a regular savings account and you’ll see why ISA’s are attractive.
If you decided to open a Stocks and Shares ISA with your £5,000 investment, could if you could then add a further £1,000 per month to your ISA (so £12,000 per year) and continued to earn an average return of 6% per annum – what could you earn?
After twenty years your investment would be worth £469,474.31. Your contribution to your investment would be £245,000 which means your tax free investment income would be £224,747.31.
Remember rates are not guaranteed and you could end up with less money than you invested.