Stocks & shares ISAs and inflation

Can a stocks and shares ISA protect your money from rising inflation?


What is inflation?

Inflation is the rate at which the price of goods and services increases. A pound will always be a pound - but as prices for things like food, fuel and energy increase, your pound will buy less.

If your money is sitting in a low-interest bank account, inflation will steadily eat into the value of your savings.

For example, if the rate of inflation was 4% and remained at that level for the next 12 months, savings of £10,000 would be 'worth' only £9,615 in a year's time.

The Bank of England's long-term inflation target is 2%. This means if they manage to keep to their target, your savings need to grow by 2% each year, just for them to retain their initial, 'real terms' value.

You can calculate the potential longer-term impact on your own savings with our inflation calculator.

How can savers respond when inflation rises?

The effect of inflation often causes people to reconsider how they can make the most of their cash.

For some, it may prompt them to consider investing, but can a stocks and shares ISA help when it comes to inflation?

A Stocks and Shares ISA can help your money grow faster than cash savings, but it does expose you to the risks of the stock market.

Can a stocks and shares ISA protect your money from inflation?

Firstly, let's look at how a stocks and shares ISA works. While cash ISAs and other savings accounts generate interest on your money, a stocks and shares ISA aims to grow your money more significantly over time. Your contributions are invested in equities (also known as 'stocks' or 'shares') and other assets, which can provide returns if the investments perform well.

Of course, no investment can guarantee inflation-beating performance. Investment values can go down as well as up, but investing does offer multiple routes to returns. Potential gains can be made from dividends, capital appreciation or bonuses.

Over the long term (most investments are recommended for a minimum of five years), stocks and shares have historically outperformed cash savings.

To see how much you could potentially grow your money, by investing in a stocks and shares ISA, try our stocks and shares calculator.

When is the right time to invest in a stocks and shares ISA?

There is no 'perfect time' to invest in a stocks and shares ISA. As the saying goes, it’s all about 'time in the market, not timing the market'. What this means is the most important thing is not when you invest, but for how long. The longer you keep your money invested, the more opportunity there is for growth.

Indeed, delaying an investment can be a risk itself. If you're investing towards a particular target, use our cost of delay calculator to see how much you could save by investing sooner.

A smoother way to invest in turbulent times

If you like the idea of investing in a stocks and shares ISA but you're concerned about the possibility of market volatility, it's worth knowing about the 'smoothing' feature of Wesleyan's With Profits Stocks and Shares ISA.

Smoothing means holding back some returns when market performance is strong, to support returns when the market experiences losses.

With smoothing applied to your investment, you should see less day-to-day fluctuation in your fund value - meaning you can worry less when the market takes a dip.

You can find out more about the With Profits Stocks and Shares ISA here. Or for personalised advice on what you could do with your money, you can book an appointment with a Specialist Financial Adviser from Wesleyan Financial Services.

Keep in mind that investment values are not guaranteed and can go down as well as up, so you could get back less than you invest.

You might be interested in...

How do ISA transfers work?

Find out what the rules are when it comes to transferring ISAs, including what can be transferred and how to make a transfer.

Short-term vs long-term investing

It's not about timing the market, but time in the market. Based on your investment goals, find out which style of investing would suit you.

What is diversification?

Learn about the benefits of diversifying an investment portfolio and why you shouldn't put all your eggs in one basket.