Sit tight or sell up: why it could pay to stay invested
When interest rates on cash increase, you might be thinking about whether to sell your Stocks and Shares ISA investments, or sit tight.
Last Updated: 1 January 2003
Cash can be important. But there’s evidence to show that holding your nerve and staying invested can often lead to better long-term returns.
This article isn’t personal advice. If you’re not sure what’s best for you, please ask for advice.
5 reasons to hold onto your Stocks and Shares ISA
"It's not about timing the market, but time in the market."
You may have heard this saying before. And looking at historical data, it’s proven true. Timing the market sounds good in theory, but it’s easier said than done. Even the most experienced investors can’t accurately guess what’s going to happen.
Read more about timing the market
Investing is for the long term
The longer you invest for, the more likely you are to outperform cash. Over a hundred years of data has shown that there’s a 91% probability of UK shares outperforming cash over any 10-year period.
But there is a trade-off. Unlike cash, the value of investments rise and fall. So you could get back less than you put in.
Read more about long-term investing
Time is money: the power of compounding
When you’re invested for the long term, you also open yourself up to the power of compound interest. By staying invested and reinvesting returns, the snowball effect can help to grow your money even more. And the best thing about compounding is that it works best when you do nothing other than leave your money invested.
Inflation has the potential to erode these returns. Which is why it’s important to try and keep up with inflation. And although cash hasn’t historically been able to beat inflation long term, investing has. Remember past performance isn’t a guide to the future.
You could lose your ISA’s tax-free status
ISAs are one of the most tax-efficient ways to save and invest. You don’t have to pay any UK tax on money held in an ISA. And you can invest up to £20,000 of your money this tax year – that’s £40,000 per couple.
So it’s worth remembering that if you withdraw money from a Stocks and Shares ISA, your money could lose its tax-efficient status. This will depend on where you move your money, as it’ll keep this tax-efficient wrapper if you transferred it to another type of ISA. But it’s something to think about, as paying more tax could impact the overall return you get.
Tax rules can change and the benefits depend on your circumstances.
Read more about the tax benefits of ISAs
You could risk breaching your tax-free personal savings allowance
Your Personal Savings Allowance allows you to earn up to £500 or £1,000 a year in tax-free interest on cash outside an ISA, depending on your tax bracket. When interest rates rise, there’s a higher chance you’ll breach this allowance if you save outside an ISA. If you do, you’ll have to pay more tax on interest.
When cash is key
Holding cash can be important – such as having a cash buffer for unexpected emergencies, or if you’ll need the money in the short term.
If you think saving cash is right for you, you could look at the HL Cash ISA or Active Savings service.
Or you might decide to hold some cash in your Stocks and Shares ISA while you decide where to invest.
See the current interest rates paid on HL accounts.
Find out more about the HL Stocks and Shares ISA
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
