Types of Investments in the UK
Investors in the United Kingdom and abroad have many options, ranging from low-risk bonds to more aggressive equity shares. Whether you are looking for income, growth, or both, there are many types of investments available in the UK that can suit your goals and risk appetite.
Some of these investments are only accessible to UK citizens or residents, while others are open to international investors. For those who are UK-based, certain investment vehicles are particularly attractive, given the unique tax advantages they provide. These include Individual Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs), and various types of pension schemes.
- ISAs, including Cash ISAs and Stocks & Shares ISAs, offer tax-efficient ways for UK residents to save or invest.
- The UK offers several types of savings accounts, like Fixed Interest Savings, Easy Access, and Regular Saver Accounts that provide secure but limited growth options.
- In the UK, SIPPs and pensions can form a critical part of long-term retirement planning.
- Shares, Real Estate Investment Trusts (REITs), and investment funds can offer attractive returns, but come with varying levels of risk.
ISAs (Individual Savings Accounts) are one of the most popular types of investments in the UK. They are tax-efficient savings accounts that allow you to invest up to £20,000 per year (in the 2023/24 tax year) without paying any tax on the interest or capital gains you earn. ISA holders do not pay taxes on interest, income, or capital gains from cash and investments held in an ISA.
Every tax year you can put money into one of each kind of ISA, up to the annual limit. The tax year runs from April 6th through April 5th, and your ISAs will not close when the tax year finishes. You’ll keep your savings on a tax-free basis for as long as you keep the money in your ISA accounts.
There are five types of ISAs:
Junior ISA (JISA)
A JISA (Junior ISA) is an ISA for children under 18 living in the UK. You can open a JISA for your child or grandchild and contribute up to £9,000 per year (in the 2023/24 tax year). The money belongs to the child and they can access it when they turn 18. JISAs can be structured as either cash or stocks & shares accounts – and your child can have both types of account.
Any parent or legal guardian can start a Junior ISA for their child, and even family and friends can make contributions (which differs from custodial accounts in the U.S. where only the custodian can make deposits).
You cannot have a Junior ISA as well as a UK Child Trust Fund. If you want to open a Junior ISA ask the provider to transfer the trust fund into it.
A cash ISA holds cash deposits and some National Savings and Investments products. It works like a regular savings account, but with the benefit of tax-free interest.
Cash ISAs are suitable for short-term savings goals or as an emergency fund. They are low-risk but also low-return. You can choose from different types of cash ISAs, such as easy access, fixed-term, or notice accounts.
Stocks & Shares ISA
A stocks and shares ISA is an ISA that holds investments such as shares of stocks, bonds, mutual funds, or ETFs (exchange-traded funds).
It works like a regular investment account, but enjoys tax-free returns. Stocks and shares ISAs are suitable for long-term savings goals or as a way to grow your wealth. They are higher-risk but also higher-return than cash ISAs, as they depend on the performance of the underlying investments.
Lifetime ISA (LISA)
A lifetime ISA (LISA) is a type of ISA that lets you save up to £4,000 per year towards buying your first home or saving for retirement, with the government adding a 25% bonus on top of what you save (i.e, up to £1,000 per year). You can open a LISA if you are aged between 18 and 39, and you can keep contributing until you are 50. You can hold cash or investments in your LISA, or a combination of both.
The £4,000 homebuyer allowance is part of the overall aggregated ISA £20,000 annual allowance, which means you can split your ISA allowance across different types of ISAs, such as cash, stocks and shares, or innovative finance. The government bonus does not count towards the £20,000 limit, so you can still get up to £1,000 of extra money every year from the Lifetime ISA bonus.
You can use your LISA savings and bonus to buy your first home if it costs £450,000 or less, and you have had the LISA for at least 12 months. You can also withdraw your LISA savings and bonus tax-free after you turn 60, or if you are terminally ill. If you withdraw your LISA savings and bonus for any other reason, you will pay a 25% withdrawal charge, which recovers the government bonus and applies a small penalty.
Innovative Finance ISA (IFISA)
An innovative finance ISA (IFISA) is a type of ISA that allows you to invest in qualified peer-to-peer lending and crowdfunding platforms, which match up investors with borrowers or businesses. Like the other types of ISA, income generated in an IFISA is tax exempt. Note that only crowdfunding debenture (debt crowdfunding) is eligible.
IFISAs can be appealing to investors due to the potentially higher returns compared to other ISA options, although they also come with higher risk.
Other Savings Account Investments
In the UK, various types of savings accounts can cater to different saving habits and needs. Each comes with its own set of benefits and constraints.
Fixed Interest Savings Account
Fixed Interest (or Fixed-Rate) Savings Accounts are a type of savings account where your money is locked away for a specified period, usually between several months and up to five years. In return for committing your money, you’re rewarded with a fixed interest rate, typically higher than that of an easy access savings account (similar to certificates of deposit, or CDs, offered by banks the U.S.). This guarantees your returns, making it a safer choice if you’re happy to set your money aside.
Easy Access Account
As the name suggests, Easy Access Accounts offer savers flexibility. You can add or withdraw funds whenever you wish, without penalties. The interest rates are usually variable and lower than those of fixed interest accounts, given the flexibility they provide. These accounts are a good option if you might need to access your savings quickly. They are equivalent to savings accounts offered by U.S. banks.
Regular Saver Account
Regular Saver Accounts encourage consistent saving habits by offering attractive interest rates to those who commit to making regular deposits (usually £50 to £500 every month, but maximum deposits vary by bank). They may also have restrictions on withdrawals. This type of account can be a good option if you’re looking to save bit by bit and do not need to use the money for everyday spending.
Notice Savings Account
Notice Savings Accounts require you to provide a set notice period (typically between 30 to 90 days) before you can withdraw your money. This can help you resist the temptation to dip into your savings, and in return, you’re usually offered a higher interest rate than easy access accounts.
All these savings accounts are subject to the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 of your money if the financial institution fails. This protection applies per person, per institution.
In the UK, private pensions form an integral part of financial planning for retirement later life. They serve as tax-advantaged long-term investment vehicles, designed to provide a steady income during retirement. For the 2023/24 tax year, the annual limit to contribute to a pension is £60,000.
The total amount you can build up in all your pensions without facing tax charges (excluding the State Pension) is currently limited to £1,073,100 for the 2023-24 tax year. This limit is known as the lifetime allowance.
You can either make regular or individual lump sum payments to a pension provider. They will send you annual statements, telling you how much your fund is worth.
The two main types of pensions are Workplace Pensions and Personal Pensions, which includes Self-Invested Personal Pensions (SIPPs).
A Workplace Pension, also known as an occupational, company, works, or work-based pension, is a pension scheme arranged by your employer. You, your employer, and the government all contribute to this pension pot.
You contribute a certain percentage of your salary every payday, and these contributions are usually automatically deducted from your salary before tax, providing immediate tax relief. Your employer also contributes an additional sum to your pension pot, which is essentially free money towards your retirement.
In addition, the government provides tax relief on your contributions. This means the money that would have gone to the government as income tax instead goes into your pension pot. For basic rate taxpayers in the UK, for every £40 you pay into your pension, your employer typically puts in £30, and the government will contribute an additional £10 in tax relief.
There are 2 main types of Workplace Pension:
- defined contribution (DC) – a pension pot based on how much is paid in by the employee. They’re sometimes called ‘money purchase’ pension schemes.
- defined benefit (DB) – a guaranteed pot based on your salary and how long you’ve worked for your employer. They’re sometimes called ‘final salary’ or ‘career average’ pension schemes.
A Personal Pension is a pension that you set up for yourself. These are defined contribution pensions (money purchase plans), which means the money you get at retirement depends on how much you pay in and how well the fund’s investments perform.
You can contribute to your personal pension regardless of your employment status. This makes personal pensions particularly useful for the self-employed, or those not enrolled in a workplace pension scheme. Like workplace pensions, personal pensions also offer tax relief. However, if you’re a higher or additional rate taxpayer, you’ll need to claim the additional rebate through your tax return.
There are two main types of personal pension: stakeholder pensions and SIPPs.
- Stakeholder pensions have low and flexible minimum contributions, capped charges, and a default investment strategy, which can be helpful if you don’t want to make investment decisions. Many default investment funds feature ‘lifestyling’. Lifestyling is when your funds are automatically moved into lower-risk investments as you approach retirement, similar to target-date or lifecycle funds in the U.S.
- A SIPP (Self-Invested Personal Pension) works in a similar way but offers a wider choice of investments. You have more control over your pension pot and can invest in a range of assets including shares, bonds, funds, and even commercial property. Like 401(k) retirement plans in the U.S., SIPP plans were created as an alternative to company-sponsored pensions, allowing retirement savers to choose their own portfolio allocations.
It’s important to note that pensions in the UK are primarily designed for retirement savings. This means access is usually limited until you reach a certain age (currently 55, but set to rise to 57 in 2028).
Shares, also known as equities or stocks, represent a portion of residual ownership in a company. Buying shares in a company means that you sort of own a small slice of that company. As a shareholder, you could potentially profit in two ways: through capital gains if you sell your shares for more than you paid, and through dividends, which are a portion of the company’s profits distributed pro-rata to shareholders.
Shares are traded on stock exchanges, with the London Stock Exchange being one of the most prominent in the UK.
Investing in shares can be rewarding, as companies’ growth can result in high returns. However, it also carries higher risk as share prices can be volatile and fluctuate due to various factors such as the company’s financial performance, economic conditions, and market sentiment.
Real Estate Investment Trusts (REITs) are entities that own, and often operate, income-generating real estate. Investing in a REIT allows you to indirectly invest in property without having to directly own any real estate. This could be residential properties, commercial properties such as offices and shopping centres, or even specialist properties like hotels.
REITs are required to distribute a majority of their taxable income to shareholders, making them an attractive option for investors seeking regular income, similar to dividend-paying stocks. Besides, they offer potential for capital growth if the value of the underlying properties increases. However, as with all investments, REITs also carry risks, including the potential for property value decreases and rental income reductions.
Investment funds (mutual funds) pool your money together with other investors to invest in a wide range of assets, including shares, bonds, and property. This shared approach can provide access to a diverse range of investments that you might not be able to afford individually, spreading the risk.
- Active funds are a type of investment fund where the investments are managed by professionals. These fund managers make decisions about where to invest the fund’s money, aiming to outperform the market or a specific benchmark. In return for this expertise, active funds generally charge higher fees than passive funds (e.g., index funds).
- Index funds, also known as tracker funds in the UK, aim to replicate the performance of a specific market index, such as the FTSE 100. Rather than trying to beat the market, these funds simply try to match it. This passive management approach typically results in lower fees than active funds, making them a cost-effective way to diversify your portfolio.
Exchange-Traded Funds (ETFs) are investment fund shares that are traded on stock exchanges, much like individual stocks. ETFs can track a wide range of indices, from broad market indices to specific sectors, commodities, or even geographical regions. They offer a flexible and cost-effective way to diversify across a wide range of assets, with the added benefit of liquidity and the ability to buy or sell shares in the ETF throughout the trading day at market prices.
Bonds and Gilts
Essentially, a bond is a loan made by an investor to a borrower, typically corporate or governmental. As an investor, when you purchase a bond, you are lending money to the issuer of the bond in return for periodic interest payments and the return of the bond’s face value when it matures.
Investing in bonds can provide a predictable income and is generally considered less risky than investing in stocks. However, they are not without risks, including credit risk (the risk that the issuer will default on their payments) and interest rate risk (where a rise in interest rates can cause the value of the bond to fall).
There are several types of bonds available to investors in the UK:
- UK government bonds, known as “gilts,” are considered among the safest investments because they are backed by the British government. They pay a fixed interest rate (known as the coupon) twice a year until they mature, at which point the investor receives the face value of the bond. The term of a gilt can range from a few years to several decades.
- Corporate bonds in the UK are issued by British companies to raise capital for various reasons, such as funding expansion or paying off other debts. They typically offer a higher rate of interest than government bonds to compensate for the additional risk, as they are reliant on the company’s ability to meet its financial obligations. They can be an excellent way for investors to generate regular income and diversify their portfolio. Retail bonds are a form of corporate bond issued directly to the public and can be traded on the London Stock Exchange’s Order book for Retail Bonds (ORB).
- Local Authority bonds are issued by local governments within the UK to finance public projects (akin to municipal bonds in the U.S.). These bonds are often tax-exempt and offer competitive interest rates, making them an attractive option for those looking for a balance of risk and return.
- Green bonds are a newer addition to the UK bond market. The proceeds from green bonds are used to fund projects with environmental benefits. They are an excellent option for socially conscious investors who want their investments to support sustainability initiatives.
Note that while shares, REITs, and investment funds are available to both UK and international investors, regulatory and tax implications may vary based on the investor’s country of residence.
Cryptocurrencies are a relatively new addition to the investment landscape and have gained significant attention globally, including in the UK. They represent a form of digital or virtual currency, secured by cryptography, making them nearly impossible to counterfeit. The most well-known cryptocurrency is Bitcoin, but there are scores of others, often referred to as altcoins, including Ethereum, Ripple, and Dogecoin. Cryptocurrencies can be bought and sold via online cryptocurrency exchanges.
Investing in cryptocurrencies can be appealing due to their high potential returns. For example, Bitcoin, since its inception in 2009, has seen periods of rapid growth. However, it’s essential to understand that cryptocurrencies are highly volatile and can fluctuate in value significantly. They should, therefore, be considered a high-risk investment. Investors could potentially lose all their investment if the value of the cryptocurrency drops below they price the purchaser paid to acquire the coin.
In the UK, cryptocurrencies are not considered legal tender, and they are not regulated in the same way as traditional currencies or investments. This means that cryptocurrency investors may not have the same protections as they do with other types of investments.
The UK’s financial regulator, the Financial Conduct Authority (FCA), has warned consumers about the risks associated with investments advertising high returns based on cryptoassets. Since January 2021, the FCA has required all UK cryptocurrency firms to be registered with them and comply with UK money laundering rules. Despite these regulations, the FCA doesn’t have consumer protection powers for the cryptoasset activities of registered firms.
CFDs and Spreads
Contracts for Difference (CFDs), spread betting, and other similar financial derivatives can also offer another avenue for retail investors in the UK. However, these types of products come with a high level of risk and complexity, and may not be suitable for everyone.
- CFDs are a type of derivative for speculating on the prices of fast-moving global financial markets, such as shares, indices, commodities, currencies, and treasuries. When you trade a CFD, you are agreeing to exchange the difference in price of an asset from the point at which the contract is opened to when it is closed — you never actually own the underlying asset, but you can still benefit if the market moves in your favour, or face a loss if it moves against you. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. While still legal, Financial Conduct Authority (FCA) has imposed limits and restrictions on the marketing, distribution, and sale of CFDs to retail consumers in the UK due to concerns about losses.
- Spread betting is another type of derivatives trading. It involves speculating on the direction of price movements. A spread betting company quotes two prices, the bid and offer price (also known as the spread), and investors bet whether the price of the underlying asset will be lower than the bid or higher than the offer. The main difference between spread betting and CFD trading in the UK is their tax treatment: spread betting is free from Capital Gains Tax and Stamp Duty, while CFD trading is not. However, tax laws can change and may depend on individual circumstances. Spread betting is also regulated by the FCA in the UK, and providers must meet certain standards and protections, including segregating client money.
What is the safest investment in the UK?
Aside from cash savings accounts, the safest investment in the UK is usually considered to be government bonds, also known as gilts. Because they are guaranteed by the British government, they have very low default risk and offer a fixed rate of interest.
What are the highest ROI investments in the UK?
Historically, shares in the stock market have offered high returns compared to other investment classes over long time periods. For instance, the FTSE 100 Index, which tracks the 100 largest companies listed on the London Stock Exchange, has provided an annual average total return of around 7.5% since its inception in 1984 through 2022, according to calculations made by the trading firm IG. However, investing in stocks carries a certain level of risk and past returns do not guarantee future outcomes.
Where can I put my money to earn the most interest in the UK?
The highest interest rates are often found in fixed-interest savings accounts (FISAs), where you agree to lock your money away for a set period. The tradeoff for the lack of liquidity is higher interest rates than on similar savings products.
What is the best investment for monthly income UK?
If you’re looking for investments in the UK that can provide a steady monthly income, several options can be considered, although the best choice for you will depend on your individual circumstances and risk tolerance. These may include dividend-paying shares, gilts & bonds, property & REITS, peer-to-peer lending, or high-interest savings accounts.
The Bottom Line
There are many investment options available in the UK for both domestic and international investors. The investment vehicles range from low-risk options like bonds to more aggressive equities, with notable mention to UK’s unique tax-advantaged options such as ISAs and SIPPs, which offer a variety of tax-efficient ways to invest, each with its unique benefits and limitations.
The UK also offers several savings account types, including Fixed Interest Savings Account, Easy Access Account, Regular Saver Account, and Notice Savings Account, all protected by the Financial Services Compensation Scheme (FSCS) up to £85,000.
In addition, various investment products such as Shares, REITs, Investment Funds, ETFs, and Bonds & Gilts offer different risk-return profiles to cater to diverse investor preferences. The rapidly evolving Cryptocurrency and CFDs & Spread Betting are also available, albeit with higher risk and volatility. The FCA has regulations in place to safeguard investor interests but warns of the risks associated with these instruments. The best investment depends on the individual’s circumstances and risk tolerance.