When investing makes sense instead of saving

Saving and investing are two different ways of putting money aside for the future, and the right choice depends mostly on what the money is for, when you will need it, and how much risk you can take. Savings accounts are for putting away money for the future, for emergencies or for expensive purchases¹. Investing means buying things such as shares or funds whose value moves up and down, in the hope of a growing income and capital growth over the long term.

The usual dividing line is time. Guidance for new investors is to be prepared to keep money invested for five to ten years, or longer², and to plan for five, ten or even 20 years if the investment is very high risk³. Money needed sooner than that generally belongs in cash savings, where the balance cannot fall. Before investing at all, the same guidance says to keep an appropriate amount of "rainy day" money in a bank or building society so you can access it quickly for unexpected outgoings or emergencies².

Saving and investing: what each one offers

A savings account is a place to put money you will need on a known date or at short notice: the future, emergencies, or expensive purchases¹. The balance is secure, and in a cash ISA the money you put in cannot go down⁷. The trade-off is growth: savings in a bank often lose value over time due to inflation, though they are very secure³.

Investing means buying assets whose value changes. Investment trusts, for example, are more risky than bank savings accounts but offer the chance of a growing income and potentially capital growth too⁸. The value of your investments can fall as well as rise, and you may get back less than you put in⁷. That risk is the price of the higher potential return.

Many people invest through funds rather than buying individual investments. Funds bring several practical benefits: you gain access to a wider range of investments than you could normally buy yourself, your investment is managed by an expert fund manager, and your money is spread across a number of different investments, giving you a diversified portfolio and spreading risk. You also gain economies of scale, as the fund management and admin costs are spread amongst the investors in the fund, and you can choose a fund which invests in line with your personal values and beliefs³. The different types are explained in investment funds, investment trusts and ETFs.

An emergency fund comes before investing

Before anything else, guidance for new investors is consistent: make sure you have some "rainy day" money, and keep an appropriate amount of cash in a bank or building society so you can access it quickly for any unexpected outgoings or emergencies⁹. The reason is mechanical rather than moral. If your car fails or your boiler dies the week after markets fall, invested money would have to be sold at a loss to cover the bill. An emergency fund means you are never forced to sell investments at the wrong moment.

How large the fund should be depends on your circumstances, and the guidance deliberately does not fix a number: it says "an appropriate amount"⁹. Someone with secure employment and no dependants needs less than a self-employed person with children. What is fixed is the order: the emergency fund comes before investing, not after.

If you have no emergency fund at all and an unexpected cost hits, official support exists but is limited and comes with conditions. On Universal Credit, for example, you may be able to get a Budgeting Advance to help pay for emergency household costs, or for help getting a job or staying in work¹⁰. That is a loan to be repaid, not a substitute for savings, and it is one more reason the standard guidance puts cash first.

Debt comes first: investing is not a way out of it

The same guidance is blunt on this point: investment is not suitable as a way to get out of debt⁹. Debt is certain and its cost is known; investment returns are neither. Borrowing at a fixed rate while hoping investments outgrow it is a gamble, not a plan, and it is the single most common mistake new investors are warned about.

Some debts are more urgent than others. Mortgages are priority debts, because a lender can repossess a home and sell it to recover the money owed¹¹. For anyone struggling with mortgage payments, help exists before repossession, and debt explains the options. Formal debt solutions carry their own commitments: a debt management plan involves a new promise to repay debts in full¹². None of these sit well alongside money locked into investments.

The practical sequence most guidance points to is therefore: deal with priority debts, deal with expensive borrowing, build the emergency fund, and only then consider investing money that is genuinely spare.

Time horizon: five years is the usual minimum

Time is the single biggest factor in whether investing makes sense. In general, investors are told to be prepared to part with their money for at least five years, as this gives a better chance of riding out the ups and downs¹³. Guidance aimed at new investors puts it the same way: be prepared to keep money invested for five to ten years, or longer³, and plan for five, ten or even 20 years if the investment is very high risk⁴.

The logic is that markets fall as well as rise, and a short holding period gives you no room to wait out a fall. A longer one does, and it also changes how much risk it can make sense to accept: if you are planning to invest for ten years or more, you may be able to take a bit more risk in exchange for the possibility of higher returns⁴. Risk and time horizon are two sides of the same decision, which is why investment risk treats them together.

Pensions are the clearest example of investing at its longest. In a workplace pension such as a master trust, 10 years before your planned retirement age your savings move into investments designed to prepare your money for retirement, including reducing investment risk¹⁴. The whole structure assumes decades of holding, which is why pensions are invested by default and short-term savings are not.

Your money can fall as well as rise

The warning that appears on every investment product is there because it is true: the value of your investments can fall as well as rise, and you may get back less than you put in⁷. Investing in the stock market is risky, and when you invest you could lose money⁹. In extreme circumstances you could even lose all your money².

That last point deserves to be stated plainly rather than buried. Losing everything is not the likely outcome of a spread portfolio of mainstream funds, but it is not impossible, and the guidance says so explicitly². It is one reason diversification matters: spreading money across many different investments is one of the main benefits of investing through funds³. Diversification and asset allocation covers how it works.

Volatility also interacts with the time horizon above. The guidance to new investors is to keep money invested for five to ten years or longer and to try to ignore the inevitable ups and downs⁹. The danger is not the fall itself but being forced to sell during one, which is why the emergency fund and the five-year rule come first.

Inflation and what it does to cash savings

Inflation is the quiet argument for investing, and it cuts against cash. Interest rates on savings often fail to keep pace with inflation, meaning your cash is losing its purchasing power². Put another way, savings in a bank often lose value over time due to inflation, however secure they are³. Official guidance agrees: if inflation is higher than the interest rate you earn, the spending power of your savings may still decrease¹⁵.

This applies even to fixed-rate products. With fixed-rate savings bonds, your original investment will not hold its value in real terms, its buying power, if the interest you are getting is less than the rate of inflation over the investment period¹⁶. Certainty about the interest rate is not certainty about what the money will buy.

Government policy has recently leaned the same way. The Government's policy objective for the change to the Cash ISA limit is to incentivise investment in stocks and shares over cash savings and encourage better returns for savers¹⁷. That is a policy choice, not a guarantee of returns, but it signals the direction of official thinking.

The balance to strike is that inflation risk and market risk are both real. Cash loses purchasing power slowly and unreliably; investments can lose actual value quickly and visibly. Neither risk disappears by choosing the other option, which is why most guidance splits money between the two by time horizon rather than picking one.

Tax wrappers: ISAs and pensions

Where you hold investments changes what tax you pay. ISAs are savings and investment plans which allow you to save a certain amount of money each year tax free¹. Money in ISAs remains free from UK Income Tax and Capital Gains Tax while you keep it there¹⁸. Most investment platforms will not charge extra for an ISA, although different platforms may have different funds and assets available¹⁹.

There are two main kinds of ISA relevant here. Cash ISAs are not subject to the risks of investing in stocks and shares, because the money you put in cannot go down⁷. Stocks and shares ISAs are where the money you put in is invested on the stock markets²⁰. The wrapper is the same; the underlying risk is entirely different.

One rule catches people out when moving money between them. Funds invested in a stocks and shares ISA can only be transferred to another stocks and shares ISA; cash ISA funds can transfer to a stocks and shares ISA or another cash ISA²¹. The same restriction is written into the ISA regulations, which prohibit the transfer of investments from a stocks and shares ISA to a cash ISA²². Money can flow from cash into investments inside the wrapper, but not back the other way.

Pensions are the other main wrapper. Investment platforms allow you to put your investments inside one or more tax-efficient wrappers: Sipps (Self-invested personal pensions), ISAs and a general investment account²³. A pension's tax treatment differs from an ISA's, and contributions can attract tax relief and employer money, but access is restricted until around retirement age. Where investments can be held compares them side by side.

The Lifetime ISA sits between the two and carries specific warnings that firms must give. The FCA's rules require firms to inform a retail client about the implications of saving or investing in a lifetime ISA as opposed to outside a wrapper, in a different wrapper or in a pension wrapper²⁴. The lifetime ISA is intended for house purchase and/or saving for retirement, either in the alternative or in combination²⁵. Two warnings matter most: saving in a lifetime ISA instead of enrolling in or contributing to a pension scheme may lose the benefit of employer contributions, and entitlement to means-tested benefits may be affected²⁴. Higher and additional rate taxpayers also lose out on higher tax relief when choosing a LISA rather than a pension, because the LISA bonus is equivalent to tax relief at the basic rate²⁶.

Costs of investing: platform fees and fund charges

Investing is not free, and costs eat into returns directly. Investment platforms charge either a percentage annual fee or a fixed amount each year²⁷. On top of that, you might be charged each time you buy and sell a share, investment trust or exchange-traded fund; fees for buying and selling traditional funds are less common²³. Exchange-traded funds generally tend to have cheaper on-going charges, though they may incur extra trading fees from investment platforms¹⁹.

Moving between platforms can also cost. You might be charged if you transfer investments from one platform to another, though many platforms have scrapped these fees, and others will offer to cover switching fees as an incentive to join them²³. The detail on all of this is in platform fees and charges and fund charges and the ongoing charges figure.

A useful comparison point: with funds, the management and admin costs are spread amongst the investors in the fund, giving economies of scale³. That does not make funds cheap, but it explains why a fund's single ongoing charge can cover more than an individual share's dealing cost would suggest.

Where investment protection stops: FSCS limits and scams

Protection for savings and protection for investments are different things, and confusing them is expensive. FSCS covers a range of financial products if a UK-authorised financial firm fails, including deposits, insurance, investments, pensions, mortgage advice and certain other regulated services²⁸. For deposits, FSCS gives automatic protection up to £120,000 per person or company, per authorised firm, if your bank, building society or credit union fails⁶.

For investments, the cover works differently. FSCS protects a range of financial products, each with its own limit to the amount of compensation it can pay²⁹. For protected investment business, the cover is 100% of the claim, with no maximum payment in the case of a long-term care insurance contract that is a pure protection contract³⁰. What FSCS covers is the failure of a firm or certain failings around it: bad or misleading investment or pension advice, negligent management of investments, misrepresentation, or fraud³¹.

What it does not cover is performance. FSCS does not pay compensation if your investment does not perform as well as you hoped³¹. If markets fall and your investments are worth less, no scheme gives that money back: that risk is yours. Does FSCS cover poor investment performance? covers this line in detail.

Before investing, FSCS suggests asking the provider three questions: is this investment product covered by FSCS, how much of my money is protected, and what would happen to my money if something happened to the provider's business³². The FSCS protection checker explains how to check. One newer point: if an aggregator, such as a savings marketplace or cash platform, deposited your money with a regulated bank that then fails, it is likely that FSCS will protect it³³.

Some products sound safer than they are. The risk involved with a capital protected structured investment is similar to investing in the stock market, and greater than an ordinary savings account³⁴. "Capital protected" does not mean "protected like a deposit".

Then there are scams. A common warning sign is being contacted unexpectedly about an investment opportunity; legitimate firms will not contact you out of the blue³⁵. Investment scams involve being encouraged to hand over money to invest in a company or product which in some cases does not exist, and these are generally long-term investments where people are locked in for five years³⁶. Research into why consumers choose unprotected providers found the top reasons were accessing a better deal, being able to afford the gamble, and a lack of awareness of FSCS protection³⁷. Investment scams lists the warning signs, and scams and fraud covers the wider picture.

Getting guidance or regulated financial advice

You do not need an adviser to invest. You can invest directly through a platform, and you can invest regularly from as little as £50 per month rather than starting with a lump sum⁵. The routes in are covered in how investing works and how to buy and sell shares.

Advice is a separate service with a separate cost. An independent financial or pensions adviser can help you decide which personal pension is suitable for you, and they usually charge for giving advice³⁸. The difference between the types of adviser is explained in independent vs restricted financial advisers, and the costs in how much does a financial adviser cost?.

Free, impartial guidance also exists. The free, impartial Money Advice Service, established by the Financial Services Act 2010, provides basic information about financial matters³⁹. Its successor services continue that role today, and MoneyHelper in particular explains options without recommending products. Guidance tells you how things work; advice tells you what to do, and only the second is regulated and usually paid for.

If an investment has already gone wrong, redress routes exist. In one ombudsman case, a complaint about investment advice was upheld and the business was told to compensate the customer by returning him to the position he would have been in if he had left his money in the high-interest deposit account⁴⁰. Mis-sold investments and bad investment advice explains how to complain, and the Financial Ombudsman Service is the final port of call without charge.