How compounding can supercharge your ISA returns

More than 14.4 million people in the UK have Cash ISAs but they could be missing out.

If you don’t need the money within five years, investing for the long term could provide stronger returns.

Here’s how you could boost your ISA returns.

This article isn’t personal advice. Unlike the security offered by cash, investments can rise and fall so you could get back less than you invest. ISA and tax rules depend on your individual circumstances and can change. If you’re not sure an action is right for you, ask for financial advice.

Growth over time – compounding

Your most powerful tool in investing is compounding.

It’s the best way to grow your money by using time to boost your returns. Understanding how it works and using it to your advantage, could make a massive difference to your financial future.

Through compounding, your money grows, by earning returns on your initial investment and returns you've already made.

It’s a snowball effect that accelerates over time, exponentially boosting your wealth in the long run.

The earlier you start, the more time your money has to grow. The effect is subtle at first, but over the course of decades, it can add up to massive amounts.

These are examples and your actual returns depend on the investments you choose as well as any volatility in the market. These figures also don’t include charges which will impact your returns.

Investing for five or more years increases your chances of positive returns compared to cash savings. A long-term horizon is key.

Assuming an 8% growth rate of return, a £50,000 ISA could hit £500,000 in 30 years.

Over half of that would come from compounded returns.

It would take 48 years at a 5% assumed rate of return, and you’ll still get there when earning a lower 2% rate of return. But you’d have to wait 117 years.

It sounds obvious but, the time and the rate of growth can play a massive part in your returns.

Should you save or invest?

Compounding works best when your money is invested, as investments typically offer higher growth rates than cash. This enhances the power of compounding, leading to a faster accumulation of wealth.

This creates far greater potential returns than parking your money in a savings account.

It’s important to consider emergency savings in the more volatile times too and if you’re still working, having three to six months’ worth of savings is a good start. If you’re retired, one year to three years’ worth could be sufficient. These can help build your rainy-day pots for any unexpected expenses.

Once you’ve built up your rainy-day fund, any other savings can be put to work.

If you don’t need access to your money in the next five years, you could consider investing in the stock market to potentially boost your returns. Remember though, that unlike the security offered by cash, the value of investments fall as well as rise, so you could get back less than you invest.

Over the past 30 years, investing in the global stock market has resulted in over 1000% returns, compared to just under 43% from cash returns. Of course, past performance isn’t a guide to future returns.

Ready to start investing?

If you’re comfortable with the risks associated with investing, the first step is to transfer a Cash ISA to a Stocks and Share ISA.

At HL, you’ll join almost one million Stocks and Shares ISA investors. There’s no cost to transfer to us but your current provider might charge exit fees though, so it’s worth checking with them first - we wouldn’t want you to lose money.

Also, if you’re transferring a fixed rate Cash ISA, remember that if you leave before the end of the term, you may have to pay a fee or lose out on interest payments.

You can also transfer from your HL Cash ISA to your HL Stocks and Shares ISA too.

Once your money is in a Stocks and Shares ISA, or if it already is, you can start investing.

Funds are a great option for simple and effective long-term investing.

Funds pool together money from lots of investors. They invest in a collection of investments which are chosen and run by a professional fund manager, so you’ll benefit from the manager’s knowledge, expertise and research into lots of different companies.

Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

You can pick your own investments or if you need help choosing, our experts have compiled a list of funds in our Wealth Shortlist.

If you prefer more of a hands off approach, our Ready-Made Investments are an all-in-one portfolio of funds created by experts, making them a simple option if you need a bit of help with where to invest. They’re fully diversified, complete solutions.

HL Funds are managed by HL’s sister company, Hargreaves Lansdown Fund Managers Ltd.