Savings rates are plummeting across the board, leaving many savers wondering if there's another way to achieve decent returns on their hard-earned cash. Well, there is – provided you've got the risk appetite, stocks & shares ISAs could be just what you're looking for.
What are stocks & shares ISAs?
A stocks & shares ISA is essentially a tax-efficient wrapper for your savings, but rather than keeping your money in cash, you're actively investing it in the stock market. Apart from that, many of the typical ISA rules apply: you're only allowed one active stocks & shares ISA per tax year, and you have an annual ISA limit (£15,240 for 2016/17) that can be fully invested in this type of ISA, or split between the three types (cash, stocks & shares and innovative finance) in any way you see fit.
Your returns are still protected from the taxman – a particular benefit for higher and additional rate taxpayers who won't get the same personal savings allowance as basic rate taxpayers – and they'll remain that way for life. These tax-free funds can now even be passed on as inheritance, too.
However, the key difference between a stocks & shares ISA and a cash variety is in terms of risk. Because you're actively investing in the stock market, you're exposed to the volatility that goes along with that; returns aren't guaranteed, and if the funds you're invested in perform badly, there's the chance that you could end up with less than you put in.
But, the trade-off for that extra risk is the potential for better returns, and with the UK stock market currently yielding around 3.7% (according to Hargreaves Lansdown) – far higher than the average easy access cash ISA rate of 0.90% – you could earn far more than if you kept your funds held in cash.
Beat the rate cuts
UK savings rates have been on a downward spiral for years, and thanks to the recent base rate cut, there's no end in sight. Quite simply, we have no way of knowing how low rates will go – negative interest rates are even being tentatively mentioned, albeit in a worse case scenario – which means savers are understandably looking for alternatives.
Stocks & shares ISAs could be a great way to beat the rate cuts, provided you've got the right appetite for risk. You'll need to be comfortable with the fact that you may get out less than you put in, and you'll also need to take a longer-term approach. To weather market volatility, you'll want to be able to invest for at least five years – there are no guarantees, but the longer the investment period, the more likely it is you'll be able to secure decent returns.
So, as long as you can commit to investing for the long term and are comfortable with the risk involved – don't invest if you think you'll need access to your money in the near term, and certainly don't plough your whole life savings into it – a stocks & shares ISA could be a great way to go. Check out our stocks & shares ISA page to get started.
Find out more about stocks & shares ISAs by reading our guide
Not comfortable with the risk involved? Opt for traditional cash ISAs instead
Check out the top easy access savings accounts to keep your money in easy reach
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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