savings

What are ETFs and how can you invest in them?

What Are ETFs and How Can You Invest in Them?

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Today I am focusing on Exchange Traded Funds, or ETFs for short. These have become increasingly popular among investors seeking a simple, low-cost way to build diversified portfolios. But what exactly are ETFs, and how can you invest in them, especially in a tax-efficient way?

What Is an ETF?

An ETF is a type of investment fund that holds a collection of assets – such as stocks, bonds, or commodities – and trades on stock exchanges much like individual shares. 

Most ETFs are designed to track the performance of a specific index, such as the FTSE 100, S&P 500, or MSCI World Index.

Because they bundle together a broad range of assets, ETFs offer instant diversification. If you buy an ETF tracking the FTSE 100, for example, you’re essentially investing in the 100 largest companies listed on the London Stock Exchange.

Why Choose ETFs?

Low cost: ETFs usually have lower management fees than actively managed funds, because they typically follow a passive investment strategy.

Diversification: A single ETF can give you exposure to hundreds or even thousands of securities across sectors or regions.

Liquidity: As ETFs are traded on stock exchanges, they can be bought or sold during market hours just like individual shares.

Potential for dividends as well as capital appreciation: If the value of shares in an ETF goes up, so does the value of your holding. Likewise, if the underlying shares pay dividends, these are either distributed to ETF investors as cash or reinvested to boost the value of your holding.

Transparency: Most ETFs publish their holdings daily, so you always know what you’re investing in.

Are There Any Drawbacks to ETFs?

While ETFs offer many benefits, they’re not without potential downsides:

Market Risk: Like all investments, ETFs can go down in value. If the underlying assets perform poorly, so will the ETF.

Tracking Error: Some ETFs may not perfectly replicate the performance of their target index due to fees or imperfect replication strategies.

Liquidity Issues: While most ETFs are highly liquid, some niche or low-volume ETFs can have wider bid-ask spreads, making it more expensive to trade them.

Over-Diversification: While diversification is usually a strength, owning too many overlapping ETFs can lead to a diluted portfolio that mirrors the overall market without any clear investment direction.

Currency Risk: If you invest in ETFs that hold assets in foreign currencies, exchange rate fluctuations can impact your returns. Of course, this applies equally to other types of investment as well.

Understanding the risks and how they relate to your investment goals is key to making informed decisions.

How to Invest in ETFs

Choose a Platform: First, you’ll need to open an account with a brokerage or investment platform that offers access to ETFs. Popular UK platforms include Hargreaves Lansdown, AJ Bell and Interactive Investor. InvestEngine specializes in ETFs and offers commission-free trading in a wide range. Trading 212 and eToro are other popular platforms that offer commission-free ETF trading.

Select Your ETFs: Decide on the asset classes and regions you want exposure to. For example, you could choose a global equity ETF, a UK government bond ETF, or a sector-specific ETF (such as technology, healthcare or renewables).

Place Your Order: ETFs can be bought and sold like shares. You can place a market order (buy at the current price) or a limit order (buy only at a specific price).

Monitor and Rebalance: Over time, you may need to adjust your portfolio to maintain your desired level of risk and diversification.

Consider Automated Services: If you don’t want to pick your own ETFs, many platforms offer ready-made portfolios (though these may entail extra fees and charges). Robo-adviser platforms such as Nutmeg – which I use myself – invest your money in ETFs and offer fully managed and fixed allocation portfolios.

Using an ISA for Tax Efficiency

One of the most tax-effective ways to invest in ETFs in the UK is through a Stocks and Shares ISA. 

An ISA (Individual Savings Account) allows you to invest up to £20,000 per tax year (as of 2025/26) without paying any tax on your investment returns. The benefits of investing in ETFs via an ISA include:

No Capital Gains Tax: Any profit you make from selling ETFs within an ISA is tax-free.

No Dividend Tax: Any dividends paid by ETFs held in an ISA are also tax-free.

No Income Tax: Likewise, no Income Tax is due on returns from your investments.

Simplicity: There is no need to declare ISA investments on your tax return.

Final Thoughts

ETFs are a powerful tool for building a diversified, cost-effective investment portfolio. Whether you’re a beginner or an experienced investor, they offer flexibility and efficiency. And by investing through an ISA, UK investors can enjoy significant tax advantages, maximizing their returns and helping their money go further

Always take into account your investment goals and tolerance for risk. And do your own ‘due diligence’ – or consult a financial adviser – before investing. All investments carry a risk of loss.

As ever, if you have any comments or questions about this article, please do post them below. Bear in mind that I am not a qualified financial adviser and cannot provide personalized financial advice.




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Could You Benefit From Help to Save?

Could You Benefit From Help to Save?

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Today I’m spotlighting a lesser-known government scheme which, if you’re eligible, can give your finances a valuable boost.

Help to Save is an initiative aimed at helping people on low incomes build up their savings. Offering generous tax-free bonuses, this scheme can provide significant benefits for qualifying individuals. 

Here’s everything you need to know.

What is Help to Save?

Help to Save is a government savings scheme designed for people on Universal Credit. 

For every £1 you save into your account, the government adds a 50p bonus, effectively giving you a 50% return. You can save up to £50 a month, with bonuses paid out at two key points over the four-year scheme.

How do the Bonuses Work?

Year 2 Bonus: After the first two years, you’ll receive a bonus worth 50% of your highest balance during that period.

Year 4 Bonus: At the end of the four years, you’ll receive a second 50% bonus based on the difference between your highest balance in years 3-4 and years 1-2.

So if, for example, you save the maximum £50 a month for two years, you’ll have £1,200 in your account. The government will then pay you a 50% bonus of £600.

If you continue saving £50 a month for the next two years, your balance excluding bonuses will be £2,400. You will then receive another £600, bringing your total bonuses to £1,200.

Putting it another way, in four years your investment of £2,400 will have accrued £1,200 in tax-free bonuses, giving you a total savings pot of £3,600. No bank savings account will offer you a guaranteed return anywhere near that!

Key Benefits of Help to Save

High returns: As mentioned above, a 50% bonus is significantly higher than any bank savings account interest rate

Flexibility: You can save as little or as much (up to £50 a month) as you like.

No risk: The scheme is government-backed, so there’s no chance of it going bust. 

Tax-free: The bonuses are tax-free, and they aren’t treated as income for benefits purposes.

Easy withdrawals: You can withdraw savings any time if you need them (though frequent withdrawals may reduce your future bonuses).

No strings: The scheme is completely free and won’t affect your credit score. In addition, once you have been accepted on Help to Save, it doesn’t matter if your circumstances change.

Who is Eligible?

Recent changes have expanded eligibility for Help to Save to include all working Universal Credit claimants who earned £1 or more in their previous assessment period. The former minimum earnings threshold of £793 per month has been removed.

You must also live in the UK (or meet specific conditions if you live abroad as a Crown servant or member of the armed forces). You must also have a UK bank account.

  • The Help to Save scheme deadline has also been extended. You can now open an account until April 2027. ​

Are There Any Age Limits?

There are no specific age restrictions for opening a Help to Save account provided you meet the criteria above. Once you have qualified for the state pension, however, you will not be eligible to receive Universal Credit. That means if you’re coming up to retirement age (currently 66, gradually rising to 67 from 6 May 2026), it’s important to apply for the scheme before you reach that age.

How to Apply

Opening a Help to Save account is straightforward. You can apply online via the official government website or using the HMRC app. 

Note that you will need a Government Gateway User ID and password. If you don’t have one of these already, you can create one during the application process. 

Closing Thoughts

For those eligible Help to Save offers a valuable opportunity to build a savings pot, with the added advantage of tax-free government bonuses. 

The scheme is designed to be simple and flexible, making it easy for individuals to develop a habit of saving and improve their financial security. If you qualify, it’s well worth considering as a step towards achieving a more stable financial future.

For more information and to apply, visit the government website. Don’t miss this chance to turn small, regular savings into a significant financial boost, before the scheme closes to new applicants in April 2027. 

As always, if you have any comments or questions about this article, please do leave them below. 




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Use Your New ISA Allowance

Why Now Could Be the Ideal Time to Take Advantage of Your New Tax-Free ISA Allowance

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As of 6 April 2025, UK investors have a fresh chance to supercharge their savings and investments with a new £20,000 Individual Savings Account (ISA) allowance.

ISAs represent a golden opportunity for investors to make their money work harder while shielding their returns from the taxman. With tax-free allowances for income frozen until April 2028 and tax-free thresholds for dividend tax and capital gains tax being slashed in the last few years, it’s more important than ever to protect your hard-earned savings and investments within an ISA wrapper.

To maximize the benefits of the new 2025/26 allowance, there’s a strong case for acting swiftly and using at least part of your £20,000 ISA allowance sooner rather than later. This is due to the power of compounding. By investing early, you give your money more time to grow, benefiting from the potential snowball effect of returns generating further returns. So the sooner you invest that £20,000 (assuming you are fortunate enough to have it) the more opportunity it has to multiply over time.

Another reason to use your ISA allowance sooner rather than later is that there are reports that Chancellor Rachel Reeves is considering slashing the tax-free allowance for cash ISAs in particular, potentially to as little as £4,000 a year. It’s probable there will be an announcement about this in the Autumn Budget. Any change is highly unlikely to be backdated, however – so taking advantage of the full allowance now could be a canny move.

In addition to the tax-free ISA allowance remaining at a relatively generous £20,000 (for now), the rules surrounding ISAs have recently undergone a welcome relaxation. One of the most significant changes is the ability to open more than one ISA of the same type (e.g. a stocks and shares ISA) with different providers in the same tax year. This means investors are no longer limited to a single provider for each type of ISA, giving them greater flexibility and choice in managing their investments.

Previously, investors were restricted to opening one cash ISA, one stocks and shares ISA and one innovative finance ISA (IFISA) per tax year. This restriction could prove frustrating for those seeking to diversify their investments or take advantage of new opportunities as the tax year progressed. Now, with the freedom to open multiple ISAs of the same type, investors can shop around for the best rates, terms and investment options without being limited to a single provider for each ISA type. They can also move some or all of their money from one provider to another without jeopardizing its tax-free status.

  • It’s important to note, however, that while the rules have been relaxed, the overall annual ISA allowance remains fixed at £20,000. This means that any contributions made across multiple ISAs of any type will count towards your total allowance for the tax year. You should still therefore take care not to exceed the annual limit to avoid any potential tax charges.

Cash ISAs offer a secure and accessible way to save, providing a tax-free environment for your savings with the added benefit of easy access to your funds when needed. Meanwhile, stocks and shares ISAs open the door to potential higher returns by investing in a wide range of assets such as equities, bonds, and funds, albeit with a higher level of risk. With a stocks and shares ISA you will never incur any liability for dividend tax, capital gains tax or income tax, even if your investments perform exceptionally well. Of course, there is no guarantee this will happen, but over a longer period stock market investments have typically outperformed cash savings, often by a substantial margin. IFISAs (e.g. from Housemartin) allow you to invest is property crowdfunding and other forms of peer-to-peer finance. They are more specialized, but may appeal to some investors looking to further diversify their portfolios.

  • In recent years I have invested much of my own annual ISA allowance in a stocks and shares ISA with Nutmeg, a robo-manager platform that has produced good returns for me. You can read my in-depth review of Nutmeg here if you wish.

Closing Thoughts

The start of a new financial year is a great time for UK investors to review their savings and investment strategies. Whether you’re looking to start a new ISA or maximize your contributions to existing accounts, taking action early can set you on the path to optimizing your returns from this important tax-saving opportunity.

By investing sooner rather than later and taking advantage of the increased flexibility in ISA provider options, savers and investors can make the most of their money while minimizing their tax liabilities. So seize this opportunity to build your wealth and protect it from the taxman today!

As always, if you have any comments or questions about this post, please do leave them below.

Disclaimer: I am not a qualified financial adviser and nothing in this blog post should be construed as personal financial advice. Everyone should do their own ‘due diligence’ before investing and seek professional advice if in any doubt how best to proceed. All investing carries a risk of loss.

 

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