Investment Calculator

Investing can help your money grow faster than inflation over the long term, but it comes with risk, and the choices can feel overwhelming. This guide explains the basics in plain English: how investment growth works, why fees matter so much, how to invest tax-efficiently in the UK and how to think about risk.

To see how a regular investment could grow, use the investment calculator.

Saving vs investing

Saving usually means keeping money in cash, such as a bank or building society account. Your money is safe and you know what you'll get, but over long periods it may not keep up with inflation.

Investing means putting money into assets such as shares, bonds or funds, aiming for higher growth over time. In exchange, the value can go up and down, sometimes sharply.

A common rule of thumb is to keep money you might need within about five years in cash, and to consider investing only money you can leave alone for longer.

How investment growth works

When you invest, returns come from two main sources: rising values of what you own, and income such as dividends or interest. If you reinvest that income, it can grow too, which is the power of compounding.

For example, investing a £10,000 lump sum plus £250 a month for 20 years, at an assumed 6% a year before fees and 0.75% in annual fees, could grow to around £131,000. You'd have paid in £70,000. In today's money, allowing for 2.5% inflation, that's about £80,000. Real returns vary from year to year, so treat this as an illustration, and try your own figures in the investment calculator.

Why fees matter

Fees are taken every year, whatever happens to your investments. Because they compound, small differences add up. In the example above, fees of 0.75% a year cost about £14,000 over 20 years compared with a fee-free investment.

Common charges include:

• Platform fees for the service you invest through, either a percentage or a flat fee
• Fund charges, shown as the ongoing charges figure (OCF)
• Dealing fees for buying and selling shares or some funds

Low-cost index funds, which track a market rather than trying to beat it, have become popular partly because their fees are low.

Investing tax-efficiently

Stocks and shares ISAs

A stocks and shares ISA lets you invest up to £20,000 a year with no tax on dividends, interest or gains. You don't need to declare it on a tax return. For most people, an ISA is the natural place to start investing.

Lifetime ISAs

If you're aged 18 to 39, a Lifetime ISA lets you save up to £4,000 a year towards your first home or retirement, with a 25% government bonus. There's a penalty for withdrawing for other reasons.

Pensions

Pensions get tax relief on contributions and often employer contributions too, making them very efficient for retirement saving, though you usually can't access the money until your late 50s.

General investment accounts

Outside ISAs and pensions, dividends above the £500 allowance and gains above the £3,000 annual exempt amount may be taxable.

Understanding risk

All investments carry some risk. Some ways to manage it:

• Diversify. Spreading money across many companies, sectors and countries reduces the impact of any one falling. Funds do this automatically.
• Invest for the long term. Short-term falls are common. Historically, longer time periods have smoothed out much of the ups and downs, though past performance isn't a guide to the future.
• Invest regularly. Monthly investing means you buy at a range of prices rather than all at once.
• Match risk to your goals. Higher-risk investments may grow more but can fall further.

Protection if something goes wrong

If an authorised investment firm fails, the Financial Services Compensation Scheme (FSCS) can protect eligible investments up to £85,000 per person per firm. This doesn't cover investments simply falling in value.

Always check a firm is authorised by the Financial Conduct Authority before investing, and be wary of anyone promising high guaranteed returns. The FCA's InvestSmart site has guidance on spotting scams.

Getting started

1. Build an emergency fund in cash first, often three to six months of essential spending.
2. Clear expensive debts such as credit cards.
3. Decide on your goals and how long you can invest for.
4. Choose an account, usually a stocks and shares ISA or pension.
5. Pick a diversified, low-cost fund if you're not sure where to start.
6. Review occasionally, but avoid reacting to every market move.

Shares, bonds and funds in brief

Shares give you part ownership of a company, with returns from rising share prices and dividends. Bonds are loans to governments or companies that usually pay fixed interest and tend to be less volatile than shares. Funds pool money from many investors to buy a spread of shares, bonds or other assets, giving instant diversification. Many beginners start with a single multi-asset or global index fund.