Summer’s here and you’re probably thinking about a long-awaited holiday to relax or explore something new. You might even be thinking about activities to do with children or grandchildren over the school holidays. But it’s a critical time to think about putting some money away too.

The hotter months are often associated with spending a bit more on entertainment and luxuries. After all, we want to get the most out of enjoying the sun and time off work. With this in mind, evaluating your current savings and how you can get the most out of your money probably isn’t the top of your priority list for the summer. But now could be the perfect time to do so.

Why calculate your savings now?

Often, when making the most of allowances and other incentives for finances, it’s a task that’s left until the last minute. However, planning how you’ll save over the rest of the tax year and beyond can help boost your efforts.

Not only do you minimise the risk of missing out on an allowance, but your savings will have potentially longer to grow. It puts you in a position to take more control of your financial situation to start building the future you want. From maximising the ISA allowance this year to reducing the potential Income Tax and finding investment opportunities, engaging with your savings over the summer, rather than putting it off, could benefit you.

Cash or invest?

So, taking a look at your finances has spurred you to put more to one side. The next thing to decide is where to hold that money: in a cash account or investments.

Cash savings provide you with security. Assuming you stay within the limit of the Financial Services Compensation Scheme (FSCS), your money is protected up to £85,000 per person per authorised bank or building society. However, interest rates are likely to be low and when you factor in inflation this can mean the value of savings falling in real terms.

Investing, on the other hand, provides you with an opportunity to benefit from returns that outpace inflation, growing your nest egg. Of course, this comes with investment risk and there’s a chance that the value of investments will fall. When investing, it’s crucial that the risk profile of investments is considered, ensuring they’re appropriate for you and your financial circumstances.

There’s no right or wrong answer when considering if cash or investments is the best place for your savings. It depends on a range of factors. Among the questions to consider are:

  • What are you saving for?
  • What is your saving time frame?
  • Do you already have an emergency fund?
  • What’s your attitude to investment risk?

Generally, investing is a better option if you already have assets to fall back on in an emergency and you’re saving with a long-term view in mind. If your time frame is shorter than five years, typically, holding savings in cash is a better option. However, there’s no one-size-fits-all solution. If you’re unsure whether your financial situation means cash savings or investing is more appropriate, please contact us.

Saving the tax-efficient way

Unfortunately, as you grow your savings and start to generate more interest or investment returns, your tax liability may increase too. As a result, it’s important to look at the most tax-efficient way to get the most out of your money.

The Personal Savings Allowance was first introduced in 2016. This means you can earn up to £1,000 on savings completely tax-free. It’s estimated the Personal Savings Allowance means 95% of savers won’t pay tax on their savings. However, the rate of tax you pay affects how much you’ll have:

  • Basic-rate taxpayers (20%) have an allowance of £1,000
  • High-rate taxpayers (40%) receive a reduced allowance of £500
  • Additional-rate taxpayers (45%) do not get a Personal Savings Allowance

Earnings from savings above these thresholds that aren’t in a tax-efficient wrapper may be considered income for tax purposes, which leads us to ISAs (Individual Savings Accounts).

ISAs are a tax-efficient way to save, interest or returns are tax-free. Each tax year you can place up to £20,000 into ISAs, choosing to deposit the full allowance into a single account or spreading it over several. There are several different types of ISAs that allow you to save efficiently with the main two being a Cash ISA, which will pay interest, or a Stocks and Shares ISA that allows you to invest through it.

If you want to reassess your current savings strategy as part of your wider financial plan, please get in touch. Our goal is to help you achieve your financial ambitions to create the lifestyle desired now and in the future.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.