Pension & retirement
Nadia Khan
Receiving a lump sum of money, whether from an inheritance, windfall, lottery win, or the proceeds from a business or property sale, can be both exhilarating and daunting. The decision on where to invest this money is crucial to securing the financial well-being of you and your loved ones.
With multiple options available, it can be challenging to determine the best course of action. Knowing where to place your windfall can be difficult, especially in times of market and economic uncertainty.
In this guide, we explore various strategies for investing your lump sum, helping you make informed decisions to maximise your financial growth and security.
The right decision for you will largely depend on what you want to do with your money and your specific needs and goals. It’s important to thoroughly assess these objectives, and we can assist you in this process. Dependent on the
Meanwhile, here are some of the main options to consider.
As a general rule, it’s usually better to consider paying off your debts before you start investing, especially if they’re high-interest debts. Not all debts are equal, though. Typically, the cost-effective option is to repay any debt with the highest interest rate first, as it’s charging you the most to borrow the money. Prioritise paying off any high-interest credit cards and loans because the interest rate you pay is likely to be higher than the rate of return on any investment you make.
A cash savings account is a good choice if you want to use your lump sum to fund short-term goals, or if you’re not quite sure what to do with it yet. By holding your lump sum in a cash savings account instead of investing it in the stock market, you won’t risk your money falling in value just before you need to access it.
If you don’t need your money for several months, you may wish to consider a notice or fixed-term savings account, as these may offer higher rates than easy-access savings accounts. It’s always worth shopping around to find the best rate on your savings, as even a small difference in the interest rate could significantly impact large sums of money.
Always be on the lookout for the best interest rates for lump sum deposits. Consider locking into a fixed rate if interest rates are expected to decline. Sometimes, longer-term commitments can lead to better returns, but this isn’t a universal rule. Stay vigilant for interest rate changes, especially after introductory periods, and be ready to transfer your funds if a better opportunity arises.
For larger sums exceeding £85,000, it’s wise to diversify your savings across different financial institutions to benefit from the Financial Services Compensation Scheme protection.
If you haven’t utilised your ISA allowance this year (2024/25), investing your lump sum in an Investment ISA can potentially allow it to grow over the long term while also shielding it from Capital Gains Tax (CGT) and Income Tax. If you sell investments outside of an ISA, you could be taxed on your profits above your annual CGT exemption. Additionally, if your investments pay dividends or interest, this could be included when calculating your overall Income Tax bill, potentially pushing you into a higher Income Tax bracket. The ISA allowance currently stands at £20,000. It is a ‘use it or lose it’ allowance, meaning you cannot carry it forward from one tax year to the next.
UK government bonds, known as ‘gilts’, could be an attractive choice if you want to use your windfall to fund a medium-term goal. Gilts are secure savings vehicles guaranteed by the government and listed on the London Stock Exchange. If gilts are held inside an Individual Savings Account (ISA) or other tax-free wrapper, there is no Capital Gains or Income Tax to pay. If held outside of an ISA or similar, gilts are free from Capital Gains Tax when you profit from a trade, but any income you get is subject to Income Tax.
Fixed-rate bonds, savings accounts, and cash ISAs can be a secure and stable place to store your lump sum. However, they may not yield as notable returns as some other investment products. Lump sums up to £85,000 that are stored in savings accounts, bonds, and cash ISAs are protected by the Financial Services Compensation Scheme.
For longer-term goals, such as retirement or leaving a legacy for the next generation, you may wish to invest a portion of your lump sum in the stock market. Although the stock market is volatile, history shows that it tends to outperform cash and bonds over extended periods. You should be comfortable committing your money for at least five years, ideally longer, to give your investments time to recover from any market downturns.
Stocks and shares ISAs or other investments are riskier but may suit you best if you’re pursuing a long-term strategy. One way to reduce risk is to spread your money across different asset classes, such as equities, bonds, and cash, as well as across sectors and regions. This diversification is because different assets, sectors, and regions tend to perform differently under various market conditions. We can assist you in building a diversified portfolio that suits your needs and attitude towards risk.
Another option is to maximise your annual pension allowance. You can invest up to £60,000 or 100% of your UK relevant earnings, or £3,600 if you have no relevant earnings (whichever is lower) into pensions yearly and benefit from Income Tax relief up until age 75. Income Tax relief provides an immediate boost to your personal pension contributions, helping to increase how much money you have at retirement.
In some circumstances, you might be able to ‘carry forward’ unused annual allowances from the previous three tax years. Remember that your pension annual allowance might be lower than £60,000 if you earn a high income or have already flexibly accessed your defined contribution pensions. We can help you determine how much your annual allowance is and whether making a pension contribution is the right choice for you.
The tax treatment of a lump sum can vary depending on its origin:
Pensions: Typically, up to 25% can be taken tax-free. However, you should expect to pay tax on the rest, in line with UK income tax bands.
Gifts: Inheritance tax may be a concern if the giver passes away within seven years.
Redundancy: In the UK, up to £30,000 of redundancy pay is tax-free, though non-cash benefits are also valued for tax purposes.
Lottery winnings: These are tax-free in the UK, as they’re considered ‘gambling’.
If you come into a lump sum of money, you’ll need to decide how best to use it. Please contact us for further information and personalised advice. We are here to help you make the most informed and beneficial decisions for your financial future. If it is a substantial sum, employing the expertise of a nearby certified financial advisor or wealth advisor with investment and estate planning experience would be a prudent choice.
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THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL, OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
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