If you’ve been fortunate enough to build up a sizable savings portfolio, you may be wondering whether it’s best to save or invest those funds. You should always be on the ball when it comes to money choices. This is your money that you’ve worked hard to accumulate. You don’t want the value being eaten away by inflation – especially with inflation having been high for the past few years.
The most successful savers and investors will utilise a range of cash and investment opportunities, taking advantage of tax breaks to increase their chances of growth.
So how much should you allocate to saving vs investing? The answer will differ for each individual but there are some common themes that we’ll discuss in this article.
Saving vs investing: Which to prioritise?
Cash savings are important. Everyone should aim for a healthy level of cash savings that covers day-to-day expenses as well as upcoming major purchases such as property, vehicles or holidays.
That said, most cash savings accounts do not keep up with inflation. So for long-term savings, you are best to invest money where you can. Your money is likely to work harder being invested, although it comes with more risk as returns are not guaranteed.
When investing, think about your long-term goals. Not all investing is risky. For example, you could invest money in a passive investment fund that tracks major companies across the world.
The chances of all these companies failing are extremely low. If you plan to hold the investment for the long term – perhaps over five years or more – the odds are your investment will rise. The MSCI World Index, for example – which tracks around 1,500 companies – has returned an average of 10.5% a year over the past five years.
If you have substantial savings, you may be willing to take higher levels of risk – perhaps by investing in new businesses or promising start-ups. At MHG Wealth, our investment management service helps you create the perfect investment plan and maximise the potential of your money.
With more risk comes the potential for greater rewards, although the chances of failure may also be higher. Nevertheless, experienced investors will say that they don’t expect all investments to work out. Some will succeed and others will fail, but the aim is that the ones that are successful will make up for any losses. At MHG Wealth, our investments focus on companies that are run by highly experienced teams and have strong profit margins to reduce investment risk.
UK start-ups are reaching unicorn status of a $1bn valuation at a faster rate than ever before. They’re only able to grow to this level thanks to investors taking a risk to fund them early in their journey – and investors will have done very well out of their success.
When calculating how much to allocate to saving vs investing, it depends on your risk tolerance. And, how much money you want to make or can afford to lose.
As a rule of thumb, the Financial Conduct Authority (FCA) recommends putting no more than 10% of your total net assets in high-risk investments. But others will be comfortable investing at a higher level than this as part of a diversified portfolio.
We explain more here about other alternative assets you could add to your portfolio, such as art, cryptocurrencies, real estate or venture capital.
Investing tax reliefs
Another reason why high-net-worth individuals invest is to take advantage of the many tax breaks on offer.
If you are based in the UK, the starting point is to max out your pension and other tax-free savings accounts such as ISAs. But there are limits on how much you can put into these accounts. This is when other tax-efficient investment schemes such as venture capital schemes are considered by high-net worth individuals.
It’s in everyone’s interests that a business is successful. It boosts employment and tax revenue, and generally makes a country more competitive through innovation. Governments therefore encourage investment into businesses through tax relief. They know that investors take a risk by investing in early-stage companies, so various incentives are offered.
As an added bonus, your investment may even be exempt from inheritance tax if the company you invest in qualifies for business relief. You must hold the investment for at least two years. In the UK, this is also why high-net worth investors consider investing in private companies as the inheritance tax rate is a hefty 40%.
UK investors can benefit from the below Venture Capital tax relief schemes:
- Seed Enterprise Investment Scheme (SEIS)
- Enterprise Investment Scheme (EIS)
- Venture Capital Trust (VCT)
Depending on the scheme, you can claim income tax relief against your original investment or capital gains tax relief on any gains or reinvestment. The table below shows in detail the different tax reliefs available to private investors.
Tax Relief SEIS EIS VCT Maximum Investment £200,000 £1m or £2m for knowledge-intensive companies £200,000 Income Tax Reflief 50% 30% 30% Dividend Income Taxable Taxable Tax-free Capital Gains Tax Excempt after three years of 50% relief earlier if reinvested Excempt after three years Excempt Inheritance Tax Excempt after two years Excempt after two years Liable Length of time you must hold the inestment Three years Three years Five years Loss Relief Yes Yes No
Sources: Gov.uk/SEIS, Gov.uk/venturecapitalschemes
Conclusion
If you are engaged with your money, you will both save and invest to protect and grow your assets as much as possible.
Cash savings are important for immediate financial security, but if you are sitting on surplus funds you should certainly consider investing. There are risks involved with investing, but you don’t need to choose investments that are high risk.
Having said that, if you have a high amount of cash and are looking to take more risk, you could consider higher-risk investments to potentially make greater returns. There are various tax reliefs you can take advantage of to reduce the financial risk to you.
We offer a wide range of investments through MHG Wealth Management. If you would like a private consultation to discuss potential investment opportunities, please contact us to schedule a call.
