Not one UK-based savings account is able to beat the rising rate of inflation, meaning that any money deposited in the bank is losing value in real terms. It’s no surprise then, that more and more people are turning to the investment markets in order to seek a return on their savings.
From compound interest, to tax-free wrappers and reinvesting dividends, there are a few things you can do to make your money work harder for you – no matter how much you have to invest.
1. Take advantage of compound interest
Compound interest works when you reinvest your returns or dividends so that you can essentially earn interest on your interest. For instance, if you invested £10,000 at a rate of 5% per annum, you would have earned £500 in interest by the end of the year, giving you a total balance of £10,500. If you simply reinvested the interest, and didn’t add to the capital, by the end of the second year you would have earned £525, bringing your total up to £11,025. Following this pattern, by the end of year five, your £10,000 investment will have grown to £12,762 – that’s £2,762 of free money!
2. Reinvest your dividends (or rental income)
Most investment platforms will offer the opportunity to automatically reinvest any dividends or rental income that you receive, on a monthly, quarterly, or annual basis. While it might be tempting to withdraw any gains – particularly if they are substantial – by reinvesting them you are able to add to your capital without actually spending any more money.
From next month, you’ll be able to automatically reinvest your dividends with us. Watch this space…
3. Think long term
It’s normal to feel spooked when you see the value of your investment drop suddenly, but no investment is entirely risk free. Volatility tends to be short-term, so if you can afford to hold on to your investment over the long-term, you have a better chance of recouping any losses and making new gains.
For instance, if you had invested your life savings in the FTSE 100 on 1 January 2008, you would have lost 24.59% of your capital by the end of the year. But if you had stayed the course, by 1 July 2017, you would have been up 13.25% on your original investment.
A long-term approach to investing can also help to take emotion out of the equation, so you can manage your portfolio with your head and not your heart and avoid impulsive sell-outs or buy-ins during temporary market blips.
4. Use tax-free incentives
Tax-free wrappers can protect your profits from being eroded by tax, and they are available to investors of all ages, no matter what you are investing for.
The Self Invested Personal Pension (SIPP) allows you to invest up to £40,000 per year, tax-free while the annual ISA allowance is currently at an all-time high of £20,000. Furthermore, any dividends under the value of £11,700 are exempt from capital gains tax, and all rental income qualifies for an annual £2,000 UK tax-free dividend allowance.
By protecting your profits from taxation, you could stand to save thousands of pounds, and that’s money that could be reinvested year after year, to maximise your income and make the most out of your original investment.
Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Please read Key Risks before investing.