Advertising Disclosure

We may receive compensation from our partners for placement of their products or services, which helps to maintain our site. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn’t influence our assessment of those products.

Guide to Low Risk Investments UK

For many months, interest rates have sat at a historic low, which means that any savings you might have in your bank account are not growing by as much as you may like them to. Due to this low-level growth, you might be tempted to invest your money instead of
saving it.

When you first begin investing, it’s easy to be overwhelmed by the sheer variety of investment options that you have. Thankfully, it’s much more simple than you may think. If you want to start investing with low-risk investments, read on to find out everything you need to know in my guide to low-risk investments UK.

Why should I save or invest?

Typically, when you have extra money left over once you have paid your monthly expenditures, you have two options: you can put it in your savings account, or you can invest it in the stock market.

However, in recent years, low interest rates have meant that keeping too much of your wealth in cash in savings accounts can be a bad idea. This has been especially true since the start of the coronavirus pandemic when the Bank of England lowered its base rate to a historic low of only 0.1%.

Low interest rates mean that your wealth won’t grow by very much while resting in your savings accounts, even if you leave it with the bank for a long time. For example, if you saved £1,000 into a savings account with an annual interest rate of 0.1%, at the end of the year you would only have gained £1 in interest.

How does inflation affect my savings?

While your wealth is still technically growing with a low rate of interest, there is a real risk that your wealth may lose its buying power over time due to the effects of inflation.

A good way to see this is with the Bank of England’s inflation calculator, which can show you how much impact it has on your money’s buying power over time.

For example, if you had £10,000 in 1990 then you would be able to buy goods and services worth that amount. However, in 2020 you would need £23,244 to buy the same goods due to an average annual rate of inflation of 2.9% in that period.

While your money is typically safe from stock market disruption while in your savings account, it is unlikely to be growing enough to outpace the rate of inflation. This means your money’s buying power is being diminished over time.

Should I keep any of my wealth in cash?

While inflation does slowly erode the true value of your cash in your savings account, it can be useful to keep some this way to act as an emergency fund.

Typically, most experts recommend that you keep enough cash to cover at least three months worth of expenses, in case you were ever to lose your income. Of course, you may want to keep a larger fund if you are self-employed or work in a field that is particularly at risk from stock market downturns.

Keeping an emergency fund can be very useful as it means that when the unexpected happens, you are less likely to be significantly affected by a financial shock. This can be particularly useful for younger people, who are typically more financially vulnerable as they have not had as long to build up their wealth.

If you don’t already have a fund in place, you may want to use any spare money to set one up before you start investing in the stock markets, as it can be handy for staying on top of your bills if your life is ever disrupted.

If your financial situation is precarious, putting money away into your savings accounts, rather than investing it, can be wiser as it helps to ensure your continued good financial health.

What are the benefits of investing?

The main benefit of investing your wealth is that, depending on how and where you choose to invest, the returns are typically greater than the rate of inflation. This means that you can grow your wealth in the long term so that you can meet your financial goals.

These goals may include ones like enjoying a comfortable retirement or building up enough wealth to purchase a home.

However, when investing it’s also important to bear in mind that doing so comes with some amount of risk. Unlike with saving, when you invest your wealth, there is always a chance of losing money. Because of this, it’s important to think carefully about how you invest, to minimise the chance of this happening.

What are investment horizons and how do they affect me?

When it comes to investing, it can be important to have a clear idea of how long you want to invest for. This goal is called your investment horizon.

Simply put, an investment horizon is how long you’re willing to hold your portfolio for before selling it. You may want to stop when you have earned a certain amount of money, or when you reach retirement.

Whatever your reason to invest, one important rule to bear in mind is that, typically, the longer you invest, the lower the chance of you losing money. As the old investment adage says, “it’s time in the market, not timing the market”.

Typically, most investment professionals will recommend that you look to invest for as long as possible, in order to reduce the impact of short-term stock market volatility on your investments.

If you want to avoid the effect of short-term disruptions, you should consider investing for at least five years.

What is diversification?

Another important thing to bear in mind when you start investing is that you should try and diversify your portfolio if you can.

Simply put, diversification means spreading your investment risk. Or put another way, not having all your eggs in one basket.

Having a diversified portfolio means that you invest in different asset classes with different levels of risk. It can also mean investing across a range of different industries and sectors, in different parts of the world.

The main benefit of portfolio diversification is that it lessens the impact of a potential stock market crash. If there is a fall in one area, whether that’s a region, an industry, or an asset class, it is hopefully offset by better performance in another.

If you think you may benefit from this, read my article about how to create a diverse portfolio for more information about how it can benefit you.

What are investing charges?

Many investment products, although not all, typically come with some sort of charge or fee attached to them. For example, if you invest in an actively managed mutual fund then you may need to pay fees for the services of a fund manager.

If you want to grow your wealth in the most effective way, it is important to shop around for the best deal.

When comparing fees, it can be easy to think that the difference of a few per cent is negligible. However, this isn’t the case as over the long term, even small percentages can add up and eat into your returns.

That’s why, before you start to invest your hard-earned money, you should take some time to do some stock market research to find the best investments for you.

What are my main options for investing?

Choosing where to invest your money can be difficult, which is why it’s important to think carefully about your options. There are a wide variety of stock markets and assets to choose from, depending on your attitude to risk.

For example, if you are willing to take more risks, you may be tempted to invest in commercial property or companies that mine precious metals. However, while these can be lucrative, they may also expose you to too much risk, as stock market downturns can severely affect their profitability.

If you’re looking for low-risk investments, here are some of the most popular choices:

  • Stocks and shares
  • Corporate bonds
  • Funds
  • Treasury bonds

It’s important to bear in mind that all assets have their own pros and cons, so it’s important to be able to make an informed decision before investing money in them.

What are stocks and shares?

One of the most common ways of investing is to buy stocks and shares in companies.

Simply put, a share is a ‘unit’ of the value of the company. For example, if a large company is worth £100 million and there are 50 million shares in that company, each share is worth £2.

The value of shares can go up or down in value for a variety of reasons, but often because the value of the company increases. For example, the share value of many pharmaceutical companies rose during 2020, as the pandemic meant that there was increased demand for their services and products.

Any buying or selling of shares is done via a stock exchange. In the UK, the London Stock Exchange is the most famous example. Here, companies and shareholders can sell to investors, agreeing on prices and quantities.

Typically, there are two ways that you can profit from buying shares: capital gains or dividends.

Capital gains

One of the main ways that people make money from investing in company shares is through capital gains. Essentially, this involves buying a share and selling it once it has increased in value.

For example, let’s say again that there’s a company worth £100 million with 50 million shares. You decide to invest, so you buy one share of the company worth £2 and then wait.

In the following year, the company experiences strong economic growth and the value of the company doubles from £100 million to £200 million.

At the end of this year, since the company’s value has doubled, the value of your share may have doubled to £4, too. This means that when you sell it, you’ll have made a profit of £2.


Another way that you can benefit from buying stocks and shares is through dividends. These are essentially bonuses paid to shareholders, usually monthly, quarterly, or annually, from company profits or reserves.

You can either take dividends as income or reinvest them through the purchase of new shares. If you choose to reinvest them, you could benefit from compound growth as you may receive even more dividends in the next year.

It’s also important to note that the dividend is calculated based on the number of shares you hold, rather than the overall value of your holding. This means that, even if a share has reduced in value, you will still typically benefit from a dividend return.

One of the main benefits of dividends is that they can be a good way of making a passive income. Of course, not all companies pay dividends, so it’s important to do some research before you invest money.

Also consider: Best stocks paying dividends for 2022

What are bonds?

A good way to understand corporate bonds is that you’re essentially giving a loan to a company, which they will pay back with interest. Businesses usually issue bonds when they need to raise money.

Like dividends, buying a bond will give you a passive income stream, as you’ll benefit from period interest payments, usually twice a year. They can also be less risky than buying shares in a company.

However, unlike when you buy shares, owning a bond gives you no ownership rights so you don’t necessarily benefit if the company grows. Of course, the flipside of this is that you also won’t be as impacted if the company struggles financially – as long as they are able to meet their loan obligations.

Trading bonds

If you buy a bond, you can simply collect the regular interest payments and wait for the bond to mature, which is when the company will repay you.

However, one alternative that you could consider is selling the bond. Once corporate bonds are issued, their value tends to fluctuate, as company shares would. If you want to simply hold the bond until it matures, these fluctuations won’t matter, as its face value and interest payments won’t change.

If the bond increases in price since you originally bought it, you could consider it selling it on as you may be able to make a profit. Of course, you’d have to weigh up the value of the decision, since you would no longer be receiving interest payments.


The final low-risk investment that you may want to consider is government bonds, also known as “treasury bonds” or more commonly called “gilts”. As the name would suggest, these bonds are issued by the UK government and are essentially very similar to corporate bonds.

Like regular bonds, these government bonds allow you to earn interest while you wait for the bond to mature, giving you a passive income stream.

Since there is a negligible risk of the government collapsing and being unable to meet its debt obligations, gilts are typically considered the epitome of a low-risk investment. However, the flipside of this is that they often have low interest rates, meaning that your investment may not grow by a significant amount.

Also consider: Your Comprehensive Guide to UK Treasury Bonds

What are my options to start investing?

If you want to grow your wealth, there is more than one way to invest. Some of the most common ways to get started are:

  • ISAs
  • Pensions
  • Funds

Of course, these options aren’t mutually exclusive since each of these options has its own benefits, and you may want to invest your money in more than one. Of course, before you act, it’s important to know a bit more about how they work.

What are ISAs?

An Individual Savings Account (ISA) is a tax-efficient way to grow your wealth and can be a great way to start investing.

One of the main benefits of an ISA is that any returns are paid free from Income Tax or Capital Gains Tax, which can help you to build your wealth faster.

Each tax year, you have a limit called the ISA allowance on how much you can save into your ISAs in any given tax year, which is 6 April to 5 April. In the 2021/22 tax year, you have an ISA allowance of £20,000.

Stocks and Shares ISAs allow you to buy and sell stocks, shares, and bonds and can be a great way to start investing.

What is the benefit of investing in a pension?

If the goal of investing is to build up your wealth in preparation for retirement, one useful option can be to invest money into a pension scheme.

When you make pension contributions, a pension fund manager will then invest your holdings on your behalf. Alternatively, if you wanted to choose your own investments, you could open a self-invested personal pension (SIPP). This means you can see a return on your retirement savings.

As well as investment returns, the other main benefit of investing money via your pension is that you can benefit from tax relief, up to a point.

To put it simply, the government offers tax relief as an incentive for people to save more for retirement. Whenever you make a contribution to your pension, some of the money that you would have paid in tax is transferred to your pension instead.

This means that the amount of tax relief you receive is dependant on how much tax you pay. This means that:

  1. If you’re a basic-rate taxpayer, you’ll receive 20% tax relief on your contributions
  2. If you’re a higher-rate taxpayer, you’ll receive 40% tax relief on your contributions
  3. If you’re an additional-rate taxpayer, you’ll receive 45% tax relief on your contributions.

Tax relief can be a valuable way of growing your wealth so that you can be sure that you have enough in retirement.

However, it’s important to be aware that there is an annual limit to how much you can contribute to your pension in a tax year and still benefit from tax relief. This is called your Annual Allowance.

In the 2021/22 tax year, this limit is £40,000 or 100% of your taxable income, whichever is lower. While you would be able to continue to contribute to your pension after this limit, you would no longer receive tax relief on those contributions.

What are funds?

Investing in funds can be an easy way of investing, as much of the difficult parts, like building your own portfolio, are done for you.

Essentially, a fund is an investment that pools money together from many different investors. Typically, a fund manager then invests that money on their behalf. Each investor is issued units, which represent a portion of the assets being held by the fund.

There are two main benefits to investing in this way. The first is that, as you may have read in my previous article about mutual funds, since many of them are run by fund managers on your behalf, you don’t have to spend time researching good potential investments yourself. Instead, you can simply benefit from the expertise of the manager and their team.

A second benefit of investing in funds is that your money will be spread across several different asset classes and market sectors. This means that your investment portfolio is diversified for you, which can significantly lower how much risk you are exposed to.

What types of funds are available?

There are a variety of funds to choose from, such as:

  • Mutual funds – A mutual fund is a classic type of fund, allowing you to pool your money with other investors. They typically come in two main types: “actively managed funds” and “passive funds”.
  • Multi-asset funds – A multi-asset fund typically invests in a wide variety of assets to maximise its diversity and lower risk for the investor.
  • Index funds – Also known as “tracker funds”, an index fund aims to match or track a particular market index, such as the performance of the FTSE 100.

Are there any tax issues I need to know about?

When it comes to investing, there are two main taxes that you need to be aware of.

Capital Gains Tax

The first tax you should be aware of is Capital Gains Tax (CGT).

This is the tax you have to pay when you sell an asset for more than you bought it for. It’s important to bear in mind that you only need to pay tax on the profit from the sale.

So for example, if you bought shares for £1,000 and they rose to be worth £1,100, you’d only potentially owe tax on the £100 gain.

Each tax year you have a CGT allowance, which is essentially how much money you can make through capital gains before having to pay tax. In the 2021/22 tax year, this stands at £12,300.

Of course, as we mentioned earlier, if you’re investing through a Stocks and Shares ISA, you don’t have to pay any CGT on the returns.

Dividends Tax

The other tax to be aware of is the Dividends Tax. As the name implies, this is a tax on the income that you receive from dividends.

Each tax year you have a Dividend Allowance for how much you can earn from dividends without having to pay tax on them. In the 2021/22 tax year, this stands at £2,000.

As you can see, there can be a lot of potential tax pitfalls to be aware of. If you’re concerned about running into one, you may benefit from seeking financial advice.

What are the benefits of working with a financial advisor?

As you probably already know, investing carries an inherent risk as any money invested can be lost. If you want to avoid this prospect, it’s important to be able to make properly informed decisions with your wealth. This is where it can be important to seek financial advice.

When you work with a professional, they can help you to find the right investments for your risk level. This can help you to grow your wealth while still having peace of mind to know that there’s a low chance of losing money. This can help to give you a sense of confidence in your investing.

Working with a financial adviser can also be useful to give you more peace of mind and reassurance if there’s ever a fall in stock markets. When there is a market downturn, it can be tempting to panic-sell, but this isn’t always the best decision. A professional can help to act as a sounding board, ensuring that you make sensible decisions.

Furthermore, they can also help you to avoid any potential tax issues, helping you to grow your wealth with confidence.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

You might also like...
*Capital at risk

We put every effort into ensuring information on Investing Reviews is accurate. Double-check details that matter to you before applying or buying.