Stocks and Shares ISAs

Transcript for -  'Why should you consider investing in stocks and shares ISAs?'

Hello and welcome to the Legal & General Investments master class series.

This is the first in our series of five video guides where we ask the question: Why should you consider investing?

There are a number of reasons to invest.

For most people, the main reason is to achieve one or more financial goals, like buying a car, paying for a wedding, your kid’s education and of course retirement.

Investing can be a good way to secure your financial future. There are a number of reasons why you might consider investing your money over the medium to long term, and using your ISA allowance is a way to make full use of the tax advantages they offer.

There is an interesting relationship between interest rates and savings. When rates are high, banks and building societies will give you a higher rate of return to save money with them.  But, when rates are low and money is cheaper to borrow, banks and building societies tend to give savers a lower interest rate for depositing money with them.

When you factor in the impact of inflation (the rise in general prices for goods and services) you’ll need a saving rate above inflation to maintain the purchasing power of your money.

So what can you do?  Well, many investors look at stocks and shares for higher potential returns. However, you need to bear in mind that the risks of investing in equity products are higher, so you could get back less than you’ve paid in, as opposed to a cash product where the total amount saved is secure. Of course you shouldn’t overlook the flexibility and easy access of most deposits.

No-one likes having to give their money away to the tax man.  So if you’re a UK resident an ISA might be one way to invest your money without allowing the taxman to eat up your profits.  An ISA stands for Individual Savings Account and there are two types: Cash ISA or stocks and shares ISA.

You can invest anything up to your current annual allowance as either a lump sum, or equivalent regular monthly contribution.  In practice this could mean putting half in a cash ISA and the other half in a stocks and shares ISA.  Or you could invest less than half in a cash ISA with the rest going in a stocks and shares ISA.  Alternatively, you can invest the entire amount in a stocks and shares ISA.

What’s brilliant about ISAs is that you don't pay any personal income tax or capital gains tax on profits, making them tax efficient.

If we look back over the last 20 years, despite some ups and downs over the last 10 years, experience has shown that investing in equities over the longer term should result in a better return than deposit based accounts.

It can be clearly seen from this graph, which compares the performance of the average of all funds in the UK All Companies sector with returns from National Savings deposit accounts over the same period.  

Of course, past performance is not a guide to the future, and the value of investments may fall as well as rise.  

Compounding occurs when the money you make from an investment is reinvested to make even more money than your initial investment. The money you make goes back to work to make you even more money than before. So the greater the return you receive the more growth you’ll see in your capital if you keep it invested over a period of time.

For example, if you invested £1,000, growing at 5% a year and re-invested your return, after 10 years your total return would be £630 compared to £500 if you didn’t re-invest.  

When considering investing, especially for events such as your retirement, you've got to think long term - and that's why it’s important you know about the benefits of compound growth. So, putting money away early in life and leaving it to compound could be a smart way to a smart retirement.

Before we end the video, let’s quickly recap the four main reasons why we think you should consider investing.

Reason one: If you’re NOT investing in an ISA, you’re probably not taking full advantage of the tax allowances available to you.

Reason two: If you’re NOT investing, you’ve probably got your money earning very little interest in an everyday savings account. Again your money is not working as hard as it could be.

Reason three: Historical data shows that money invested, for example in the stock market, over the long term, has traditionally grown at a faster rate than, money simply left in bank accounts.

Reason four: Compound growth rewards investors for keeping their money invested over time with potentially higher returns on their investments.

Thank you for watching this Legal & General Investments Master Class Video.

In the next episode we’ll be asking ‘Are you ready to invest?’

In the meantime, if you’d like to take a look at our range of stocks and shares ISAs, please visit our website.

All investments carry an element of risk. Please bear in mind:

• The value of your investment may fall as well as rise and you might not get back your original investment.
• If you choose an investment fund which invests overseas, changes in exchange rates between currencies may cause the value of your investment and the level of income to fall as well as rise.
• The tax efficiency of ISAs is based on current rules. The current tax situation may not be maintained and the value of the tax treatment depends on individual circumstances.
• These investments are medium to long term, ideally five years or more.

Find out more about Legal & General investments