James Wright, Independent Financial Adviser, looks at the investment options available to students and young adults who want to save for their future.
Savings accounts in a bank or building society
Minimum investment is usually £1 but varies by provider and type of account. Interest rates vary but regular (monthly) savings plans usually give a higher rate of interest than one-off deposits. Interest is tax free if within your annual Personal Savings Allowance of £1,000 for basic rate taxpayers, £500 for higher rate taxpayers. If over these figures then taxed at 20%, 40% and 45% depending on your tax bracket.
Lifetime ISAs (LISA)
A savings product for first time buyers, or to save for later in life. Can only be opened by savers aged 18-40, who receive an addition £1 for every £4 contributed. Savings are free of Income Tax and Capital Gains Tax. Minimum investment is £1 for a Cash LISA, or £100 lump sum or £25 per month for an Investment LISA. Maximum saving £4,000 per year (with a further £1,000 added by the government). Interest rates or potential growth varies depending on the product or fund(s) selected. Can only be used to purchase your first property, or if you are aged 60 or over, otherwise there is a 25% penalty. A good option for first time buyers, but a pension should be considered for retirement funding.
Cash ISAs are free from Income Tax and are set up as either Instant Access or Fixed Term. Higher interest is available for Fixed Term as opposed to Instant Access. Minimum investment is £1, and interest is usually higher than a bank or building society account but they vary considerably.
There may be withdrawal restrictions or penalties applying to Fixed Term Cash ISAs. £20,000 can be saved into each one per year (less any contributions to other ISAs). Basic Rate and Higher Rate tax payers have a Personal Savings Allowance for interest of £1,000 or £500 respectively.
Stock and Shares ISAs
Available to all savers aged over 18 and free from Income Tax and Capital Gains Tax. Minimum investment is dependent on the terms of the ISA provider: typical monthly minimum investment is £25, one-off typically £100. Maximum investment is £20,000 per year (less any contributions to other ISAs). Rates of return vary depending on attitude to risk and funds selected. Consider your timescale for investment. The shorter the term of investment the higher the risk is being taken.
Ethical Investment Products
Ethical investments incorporate the saver’s ethical, social and environmental values into the process. This area is also often referred to as Sustainable and Responsible Investment (SRI). Typically the investment will be placed into funds which take a responsible approach to environmental, social and governance issues, and which avoid investing in areas such as armaments, human rights abuse and environmental damage. Further independent advice is recommended.
Premium Bonds (NS&I)
The minimum investment is £25, and the maximum value of Bonds that can be held is £50,000. No interest is earned, the value of the Bond remains static for as long as it is held. There is no tax due on any winnings. The odds of winning are 24,500 to 1 per £1 Premium Bond, and the Bonds are fully secured by the government.
Retirement may be a long way off for millennials, but the earlier a person starts saving into a pension the better since every employer is required to contribute to each employee’s pension, and the government will also boost the pension pot in the form of tax relief. If you have opted out of a workplace scheme you have effectively taken a pay cut as you’re unable to receive the employer contributions elsewhere.Returns within the pension will be dependent on the invested finds and should be reviewed alongside an individual's attitude to risk.
Other considerations likely to affect millennials and young adults:
Paying off your existing debts: If you have outstanding debts on, for example, credit cards, then you should concentrate on clearing those. The interest rate on credit card debt if you repay the monthly minimum is far higher than any interest on easy-access saving accounts.
Student loans: Although the general advice to young people is almost always to pay off their debts, in the case of student loans these function more as a graduate tax, with repayments based on how much the person is earning. You are able to pay off the debt early if you wish, but there is no incentive to do so.
Child Benefit: Paid monthly to all parents from the birth of a child to when they become 16 (or 20 if they are in education or training). If either parent’s total taxable income before tax is over £50,000 then a tax charge known as the High Income Child Benefit Charge will apply. This also relates to adults if they have a child living with them who is not their own child.
Before you commit to any investment product you are strongly advised to get advice from an independent financial adviser. The information above provides an overview of the products and services available to you and should not be used as a guide to investing.