Residents in the United Kingdom who are aged 18 and over can invest up to £20,000 each tax year into a Cash Individual Savings Account (ISA).
The interest earned in a Cash ISA is tax-free and will be paid into the account annually or monthly, depending on whether it is a fixed or variable account.
Whilst tax-free earnings benefit savers and investors, Cash ISA interest rates can vary depending on various economic, financial, and geopolitical factors. Even when you open a fixed-rate Cash ISA, the interest rate is only guaranteed for the length of the term.
As a result, many UK residents instead opt to invest in safe-haven assets, which offer them protection during turbulent times.
This article will explore some examples of safe haven assets and why they are safer than investing in a Cash ISA.
What Are Safe Haven Assets?
Government Bonds
Government bonds, sometimes known in the UK as gilts, are a type of government-issued loan. When a government needs to borrow money or raise more capital, it offers bonds to investors, such as individuals, institutions, or foreign governments.
Once an investor has lent their money to the government, they would be paid back by the government at the maturity date of the short-term, medium-term, or long-term loan.
The government is considered one of the safest borrowers because it can tax its citizens and print money (through the Bank of England) to ensure debts are paid.
In addition, the UK government has an excellent track record of honouring its debt, even during times of crisis. This means government bonds are a low-risk safe haven asset for individual investors.
Defensive Stocks
Defensive stocks are when an investor buys shares in a company that sells products or services considered to be essential to humans. Companies in the defensive sector, also known as the non-cyclical sector, include utilities, healthcare, telecommunications, and some food and beverage.
Companies in the defensive sector are likely to retain their value and perform well during turbulent times because there is a constant demand for their products or services, regardless of the surrounding economic, financial, or geopolitical factors.
For example, people still need access to healthcare services when the economy is performing poorly, and even more so in the wake of a natural disaster or pandemic. This makes defensive stocks an excellent safe-haven investment.
Gold
Gold is regarded as one of the most popular safe-haven assets to invest in because it is a physical commodity, so factors such as currencies, interest rates, and inflation do not impact its value.
However, unlike stocks and bonds, gold does not generate income through dividends or interest. Your returns are based solely on the price appreciation of your gold.
Is a Cash ISA Safer Than Safe Haven Investments?
As the introduction mentions, Cash ISA interest rates can vary depending on various economic, financial, and geopolitical factors. This includes inflation, central bank policies (Bank of England in the UK), economic growth, unemployment rates, and global events such as wars and pandemics.
Meanwhile, the safe haven assets explored above are not correlated to the economy, so they will retain or even increase in value during times of economic uncertainty, financial market volatility, or geopolitical instability.
It is essential to have a basic understanding of the types of safe haven assets available, their risks and characteristics, and the economic environment around you. This will help you choose the best investment option for your financial goals.
For example, short-term government bonds are a good choice if you are investing for short-term safety, while gold is a better option for protecting yourself against long-term economic instability.
Wrapping Up
During past events such as the 2008-2009 Global Financial Crisis and the Covid pandemic, investors have turned to safe-haven assets. We expect the cost of living crisis, which is resulting in increased inflation rates, to convince others to do the same.
If you’re unsure where to invest your money, you should speak to a financial advisor or a robo-advisor. These services help you make an informed decision about which safe haven assets might fit your financial goals.
In addition, investment platforms can also help you understand the basics of safe haven investing.
