Where is best to invest £500 a month?

30 April 2013

Q

I have around £500 a month to invest but am torn between increasing my pension and sticking it in an ISA.The latter rates are abysmal yet reasonably safe. The former is my gut-feeling preference but I'm shocked to hear you need about £200,000 to produce an income equivalent to the state pension.I'm 50 and have a frozen pension predicted to give £7,000 a year at 65 and another stakeholder pension likely to give about £2,000 a year.I could take out a mortgage on a property and try to rent it out. What would be the best option?
From
SC, Wisbech

A

For most people, the best approach for long-term savings is a combination of pensions and ISAs. Pensions provide initial tax relief that gives your savings an immediate uplift but they are inflexible.

ISAs, on the other hand, can still be tax-efficient and you can access your money whenever you like.

Remember, too, you can utilise your stocks and shares ISA allowance (which is £11,520 for the current tax year). Over the long term, saving in stocks and shares will grow faster than savings in cash, where interest rates are paltry.

Find the best Cash ISA or savings account for you

The mix of pensions and ISAs depends on your own circumstances. Pensions are most suitable for higher-rate taxpayers, particularly if they won't be paying higher-rate tax when they eventually draw an income from it.

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ISAs are most suitable for basic-rate taxpayers or those who want the flexibility they provide.

A pension pot target of £200,000 or more is achievable for many people if they start saving early enough.

Buying property could work out well but is a much higher risk. Most people should focus instead on building up their pension and ISAs.