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Where to invest your lockdown savings

01 October 2021

6 minute read

We discuss investment options for savings made during the pandemic.

Who’s this for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

UK households have built up over £190 billion of savings since the start of the pandemic1.

While a recent study claims we are planning to splurge lockdown savings on clothes, dining out and holidays2, research from Barclays Smart Investor3 earlier this year revealed that over 8 in 10 new investors planned to keep up their investing habits once restrictions were lifted.

Nearly half (43%) planned to make small sacrifices to balance their post-lockdown spending with their newfound hobby.

When asked where they might make these savings, 72% said expensive dinners and meals out, with a third limiting daily coffees (29%) and after work drinks (27%).

While a spree will help boost the UK economy – and perhaps your mood – it’s important to ensure the rest of your money is working hard by choosing the most appropriate home for it.

Robert Smith, Head of Behavioural Finance at Barclays Wealth, said: “If you have managed to build a habit of saving on a regular basis you can feel proud that a lot of the difficult work is done. As there are more opportunities to spend again now it may be tempting to perhaps stop saving for a spell. However, starting again will be much harder once you get used to having more cash to spend each month.

“When it comes to finding a home for your money, cash savings feel very secure. Whilst it’s important to have access to cash for emergencies, over longer periods lower interest rates and inflation means than you can’t buy as much with the money. Having too much saved in cash means missing out on the possibility of better returns from investing. It’s important to understand that investing does come with risk and there is a possibility you can lose the money you invest, but this risk can be managed by investing sensibly over the long-term.”

Finding a home for your money

Different types of savings accounts and investment vehicles meet different needs. As your savings build, you might consider using a combination of places to help you get the most from your money.

First it’s crucial to build up a decent rainy day savings account. Having some money tucked away can help you feel more secure and in control for any unexpected costs such as a new set of tyres for the car or a new boiler.

Once you have your savings to a level you’re happy with, it’s time to start thinking longer term.

If you don’t think you’ll need access to your money for at least five years, investing offers the chance of better returns than you could get from saving in a deposit account.

Here we look at the features of an investment (stocks and shares) ISA and a self-invested personal pension (SIPP) as well as a general investment account.

Investment ISAs

You might want to consider opening an ISA or topping up an existing one. An ISA is not an investment in itself, but a valuable tax wrapper around your investments.

Usually when you invest you have to pay tax on returns. Yet there is no UK tax to pay on ISA gains.

There is no UK tax charged on dividends that would be applied on income-paying investments outside an ISA above the annual £2,000 limit per investor.

Above that basic, higher and additional-rate taxpayers would pay 7.5%, 32.5% and 38.1% respectively. The Government has announced higher rates are planned to come into force in April 2022 of 8.75% for basic rate, and for higher-rate and additional -rate taxpayers, rates will rise to 33.75% and 39.35% respectively from April 2022.

When you invest in an ISA, even if the profit you make is above the current Capital Gains Tax (CGT) threshold of £12,300, you won’t have to pay any UK Income or Capital Gains Tax.

Even better, you do not need to declare details of your ISA investments on any tax return.

You can access your ISA investments with no restrictions. In fact, for some ISA products (subject to the ISA terms & conditions), you can withdraw cash from your ISA and pay it back in before the end of the tax year without it affecting your annual allowance.

General Investment Account

Should your ISA allowance (£20,000 per year) be maxed out you might decide to use a general investment account.

This has the same investment options but without the UK tax-free benefits.

SIPPs

A Self-Invested Personal Pension (SIPP) is another type of tax-efficient investment wrapper inside which investors can place a portfolio of investments.

One attraction for investors is that when you contribute to your retirement savings in a SIPP, you get a tax top-up at the rate of 20%, 40% or 45%. That means if a basic-rate taxpayer pays in £800, it will turn into £1,000. It’s even more tax-efficient for higher-rate taxpayers who can claim back an additional £200 through a self-assessment form.

You can even carry forward unused annual allowance from the previous three years, so there’s much tax to be saved if you’re not already contributing.

It means your money can grow tax-free for decades.

SIPPs offer freedom to choose how and where your money is invested within the options available.

The trade-off to the tax perks is that you can’t access the money until you turn 55, when the pension freedoms kick in. From April 2028 the minimum age will rise to 57.

However, this does ensure the money is reserved for the time when eventually you stop work and need to replace your earnings with another income.

When the time comes and you’re over 55 (57 from 2028), you can convert your SIPP into an income drawdown account, which allows you to take as little or as much as you wish as a one-off sum or regular income – while the rest remains invested. After the 25% tax-free lump sum is taken, any further withdrawals are taxed for income.

Conclusion

You don’t necessarily have to choose just one kind of investment vehicle - you can split your money and use a mix on your investment journey.

Robert Smith added: “The best way to keep an investment habit going is to build it into your routine, so perhaps set up a regular investment amount. Making it automated saves you having to think about it too much and ensures it happens. Don’t forget to get the money invested though, rather than sitting as cash in your investment account.”

Ready to invest?

You can choose your own investments for your ISA or SIPP using Smart Investor which offers over 2,000 funds, as well as Exchange Traded Funds (ETFs), investment trusts and shares. To help wade through the choices, you can consider those on the Barclays Fund List which is made up of a number of funds from each of the investment sectors we believe are key for building a diversified portfolio.

For investors that prefer to avoid having to select their own investments it’s worth considering a diversified investment fund, which invests across multiple markets.

The Barclays Ready-made Investments (RMI) is just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

An option for ISA investors (with at least £5,000 to invest) who want us to manage the investments for them, is our Plan & Invest service.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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Start investing to make the most of those special times to come by using your new 2021-22 ISA allowance in an Investment ISA today. The sooner you begin, the sooner you could grow your money, tax efficiently.

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