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What is compound interest and how does it make you money?

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My Arc Compound Interest | Trinity Insurance

The next article in our series from MyArk is on Compound Interest. If you’re over 18 but nearing 40, read on!

What is compound interest and how does it make you money?

Do you want to earn money with just £1? Here’s how – With the secret sauce of compound interest, and the free money in a LISA.

Don’t worry of you aren’t clear on compound interest, you are in good company. 2 in 3 adults don’t know what it is either. Compound interest means you can earn ‘interest-on-interest’ or said another way, even the interest you earn on the money in an investment, will earn interest. It’s compounded!


Jane put £10 into a savings account with 10% interest rate Jane receives £1 which gives her a total of £11 The following year Jane gets her 10% interest, but on the total amount (£11) Janes new interest amount is £1.10 Jane now has £12.10

Yay Jane!!!!!

Most bank accounts and investments generate compound interest BUT you can get taxed on it as it is seen as income. One way to avoid tax is to invest in an ISA (Independent savings account). Any money invested through an ISA is exempt from capital gains tax – i.e. you don’t have to pay tax on your interest. Under 40? Even better you can invest through a L-ISA

What is a L-ISA (Lifetime ISA)?

A Lifetime ISA can be invested in either cash or in stocks and shares account, but the bonus is that the Government matches any amount you save by 25%. In other words, if you invest £1, the government will put 25p into the account. The maximum you can add each year is £4,000. If you save this much the government will pay an ADDITIONAL £1,000 into your LISA.

What’s the catch? There is no ‘catch’ at all, but you can only use the money for:

1. Buying your first home

2. Save for a pension which you can access at 60

You cannot release the funds for any other reason, without potentially being penalised – so do consider this first. Everyone is entitled to a L-ISA over the age of 18. You MUST open the account before your 40th birthday.