Research from Fair Investment Company has revealed that by saving £525 a month into a stocks and shares ISA a 25-year-old could build up savings of more than £35,000* by the time they are 30.

With new studies showing buying a house is increasingly out of reach for many, with the average age of a first time buyer now as high as 38 and the emergence of a so-called ‘generation rent’.
Investing within the ISA allowance can help savers make the most of their money and realise their aims, with the benefit of avoiding any potential tax liability on the returns made.

For people wanting to become home owners, saving is a viable route to that goal.

Small amounts can build up

HMRC statistics show that the average amount invested into a stocks and shares ISA is less than 60 per cent of the whole allowance**. The current ISA allowance is £10,680, so if an individual were to save 60 per cent of that – which is £6,300 a year, or £525 a month – into a stocks and shares ISA for 5 years, assuming growth of 7.00% pa* they would have a total of £36,852.83 after five years.

Head of investment at Fair Investment Company, Oliver Roylance-Smith, said: “Saving the full ISA allowance each year is unrealistic for most people. This calculation shows that even if you can’t afford to invest the full amount each year, and don’t benefit from market leading returns every step of the way, you can still build up a healthy fund.

“If the ultimate goal is being able to own a home, saving over a five year period seems like a reasonable time frame.”

Low savings rates and homeownership

A Halifax-commissioned report published on 31 May 2011 into attitudes to home ownership amongst 20 to 45-year-olds showed 60% of people believe it is very hard or virtually impossible for a first time buyer to obtain a mortgage.

This is primarily due to the price of houses and the percentage required as a deposit, making home ownership seem unobtainable.

The Halifax report produced by the National Centre for Social Research showed 64 per cent of non-home owners believed they have no prospect of buying a home. Only 5% of this group were making sacrifices to save for a deposit.

Land Registry figures for April showed the average house price for England and Wales is £163,083. A 20 per cent deposit for a house at that price would be £32,617.

Saving

Oliver Roylance-Smith said: “Compound interest can really add up, especially if you drip feed contributions regularly. While £525 a month is still a lot of money for many people, it shows that the amount you save doesn’t have to be large to build up a healthy fund and reach a unique financial milestone.”

 *The calculation is a compound interest calculation assuming 7% annual growth. It does not take account the potential impact of inflation during this period. As the ISA allowance is currently set to increase with inflation, if 60 per cent of the allowance was saved each year the amount would rise incrementally as the overall allowance rises.

Use as a guide only.

**HMRC figures for the 2009/10 tax year shows that the average amount invested into a stocks and shares ISA was £4,155. This is 58% of the full £7,200 allowance for that tax year. The new allowance for 2011/12 is £10,680, 58% of which is £6,194.40. For clearer calculation purposes, this has been rounded up to £6,300 which is easily divisible by 12 for an illustrative monthly investment of £525.

© Fair Investment Company Ltd