Quadruple the return on your savings!

Many of us are ignoring a form of savings account that delivered brilliant returns last year.

When it comes to getting a decent return on your savings, many of us realise that an ISA is a vital part of any savings planning, as you manage to sidestep the taxman on the interest you earn.

However, it appears many of us are ignoring a more lucrative form of ISA – the stocks and shares ISA.

An improved performance

Figures from HM Revenue & Customs demonstrate just how well stocks and shares ISAs performed in the last tax year. It revealed that investors who put £5,100 into a stocks and shares ISA during the 2009-10 tax year would have enjoyed a return of £593 before charges.

When you consider that if the same sum was placed into a cash ISA instead, the return would have been just £145, it’s clear that stocks and shares ISAs offer the opportunity of a real return on your savings.

However, despite the solid return they can offer, many of us overlook them when planning what to do with our savings. While 11.9 million cash ISAs were opened in 2009-10, only a little over 3 million stocks and shares ISAs were opened. So cash ISAs are four times more popular than stocks and shares ISAs, despite offering only a quarter of the returns.

Why are so many of us ignoring them?

How they work

First, it’s worth reviewing just what a stocks and shares ISA is, and how much you can put away in them.

The total amount that you can save, tax-free, each year in an ISA is £10,200*. A maximum of £5,100 of that can be held in cash. However, there is no limit on how much you can save in a stocks and shares ISA. So if you wanted to, you could place all £10,200 in a stocks and shares ISA.

As the name suggests, your savings will be invested into the stock market. This is probably what puts some savers off. With a cash ISA, you are told exactly what return you can expect on your cash – there is no uncertainty. But when your money goes into the stock market, anything can happen.

Obviously, that makes them a riskier home for your money, as shares can go down as well as up. Make the wrong choice in investments, and you could finish the tax year with less than you started, which is not really how savings are supposed to work!

How hands-on do you want to be?

Of course, exactly how you invest your money comes down to just how hands-on you want to be.

If you fancy yourself as a bit of a Warren Buffet, able to spot underpriced shares and cash in, then you might like to choose the individual stocks and shares to invest in yourself, in the form of a self-select stocks and shares ISA. These tend to be available from stockbrokers and share-dealing firms like TD Waterhouse, though plenty of more mainstream names such as Halifax and NatWest also offer the service.

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However, if you don’t fancy trawling through the Financial Times on a daily basis in order to spot a few money-making opportunities, you can leave it to the experts. You can instead invest your money in unit trusts, investment trusts, open-ended investment companies and the like, and leave the decision-making to the fund managers and research teams who are paid to know where and when to invest your money in order to get the best return.

Of course, it’s still down to you to work out which investment outfit to trust with your savings, so doing some research on previous performance and where they have invested previously is absolutely essential. Remember, just because they have done well in the past doesn’t mean they will do so in the future, but it can give you an idea of what to expect.

Taking your time

As any seasoned investor will tell you, timing is hugely important when it comes to playing the stock market. After all, the whole idea is to buy when the stocks are cheap, and sell when they are worth far more.

However, it’s also really important to play the long game. Investing should be viewed as a long-term thing, not a way to get rich quick. And if you have a poor first year, so long as you can afford it, you should try and stick it out – chances are things will improve eventually.

Virgin Money, which has its own stocks and shares ISA, the Virgin UK Index Tracking Trust ISA, illustrates this point well. The firm confirmed that if you had invested in the trust between January 2007 and January 2011, you would have seen a loss of a little under 4%. However, had you invested from January 2003, you would have instead seen a return of 63.43%!

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Clearly, being patient with your investment is the way to go, even if you have a few hiccups along the way.

Spreading your risk

It should go without saying that putting all of your money into shares is a pretty risky tactic, particularly given the volatility of the markets over the past couple of years. Even if things start looking stable economically, all you need is an uprising like we have seen in Egypt these past few weeks, and everything can come crashing down.

As a result, it’s probably a more sensible move to split the money that you save each year in your ISAs between cash and shares. That way you can hopefully cash in on a solid investment performance, while enjoying the safety net of knowing exactly what you will get out of the money in your cash ISA.

For ideas on where to put your cash, have a read of Get the best cash ISA of the year! You can find out more about ISAs in our free ISA guides.

*This will rise to £10,680 on 6 April 2011.

More: Get a great ISA | Check out our free ISA guides | Get the lowest loan rate now! | Don’t fall for these home insurance myths!