Stocks and shares ISAs can help to supercharge your savings

Currently, UK inflation rates are hovering at a staggering 7.90%, a sharp contrast to the long-term average of 2.79%.

This represents a slight dip from the previous month’s rate of 8.70% and last year’s peak of 9.40%, but these figures still far outstrip the returns from traditional savings accounts.

In this tumultuous economic climate, savers are desperately seeking strategies to protect their money from the ravages of inflation. In an era where conventional savings accounts struggle to outpace inflation, UK residents have a unique tax-efficient investment vehicle at their disposal: the Stocks and Shares ISA.

Can a Stocks and Shares ISA outperform a savings account?

Pete Hykin, CEO and Co-founder of Penfold, sees the Stocks and Shares ISA as an opportunity, bringing with it benefits, risks, and potential returns that could outperform standard savings accounts.

The Stocks and Shares ISA is not your everyday savings tool. Instead of simply holding cash, it’s an account where your deposited capital is spread across a wide array of investments – shares, stocks, bonds, and funds. The real showstopper? This investment vehicle is exempt from UK tax. “Every pound you make in gains within this account remains entirely yours – no tax deductions,” comments Hykin.

This contrasts sharply with traditional savings accounts, where interest earnings are often taxed and, due to current low-interest rates, frequently fail to beat inflation. The Stocks and Shares ISA is a golden opportunity to garner potentially higher returns over time. However, with reward comes risk. The value of your investments can fluctuate, and therefore the possibility of financial loss should be acknowledged.

But how easy is it to set one up? “Surprisingly simple,” says Hykin. UK residents over 18 can open a Stocks and Shares ISA through an online platform or an investment broker.

How much to deposit each month is a personal decision based on your individual financial circumstances. With the power of compounding, even modest amounts can grow significantly over time. But beware, there’s an upper limit – you can’t invest more than £20,000 per year.

• UK ISA allowance changes: what would this mean for active investors?
• The AIM stocks ISA investment strategy 10 years on
• Five tips to help you minimise capital gains tax

Understand your risk appetite

Investing wisely also requires managing risks. “Your investments can decrease as well as increase in value,” warns Hykin. The key, he advises, is to understand your risk appetite and ensure that your portfolio is diverse. This means not putting all your financial eggs in one basket.

It’s also essential to scrutinise the fees or charges from your ISA provider. “Overlook this, and you risk diminishing your returns,” says Hykin.

Finally, Hykin underscores that investing is a long game. The stock market may take you on a rollercoaster of ups and downs in the short term, but historically, it has shown an upward trajectory over a longer timeline. However, if you’re someone who might need to access your cash shortly, Hykin warns, this may not be the right choice for you.

This spotlight on Stocks and Shares ISA’s serves as a reminder of the importance of exploring all financial avenues when planning for a secure future. As Hykin rightly puts it, understanding and leveraging the unique financial tools available can be the difference between simply saving and smartly investing.