When you’ve got £75,000 sat in your savings account, it can be difficult knowing what to do with it. By putting it to work on the financial markets, you could get one step closer to your dream retirement – but how can you maximise your returns?
Priority one; make sure you’ve got three months of savings in an easily accessible cash account and pay off any remaining expensive debt you have.
It can be frustrating seeing your money gathering dust in a cash savings account – especially as inflation can erode the purchasing power of your savings over time. It’s important, however, that you have a rainy day fund in case of an emergency.
Investing for you
Your financial goals are personal, so the way you invest to achieve them should be too. By understanding your attitude to risk and your investor profile, you can invest in a way that will help you maximise your returns and take you one step closer to your financial goals.
Your investor profile depends on what you’re investing for, when you’ll want your money and your attitude to risk. If you’re looking to grow your money to pay for a house deposit in two years, you’re going to have a more conservative portfolio than someone who is saving for a retirement that they hope to start in 30 years.
Your risk tolerance will impact what investments you have in your portfolio. A conservative investor will have a higher proportion of bonds than equities. Bonds are a debt investment and are seen as less risky than equities.
When you invest in a bond, you expect your loan to be repaid in full at maturity. Investors also expect a regular income from the bond’s coupon.
An investor that can afford to take on more risk will have a larger exposure to equities in their portfolio. The equity markets are more volatile than fixed income, but this means your scope for return is also higher.
Whether you’re facing the financial markets fresh-faced or are a seasoned pro, £75,000 is a lot of money and it can feel overwhelming looking for the best way to invest it.
One way to manage the risk in your investments is to spread your money across investments, asset classes and geographies. Diversification aims to use the gains made from some parts of your portfolio to offset any losses made elsewhere.
Equities, bonds and cash equivalents – short-term financial products – are the main asset classes that are the building blocks to diversified investment portfolios.
These asset classes rarely perform in sync with each other, so building a portfolio of assets that don’t perform in a similar way can help minimise risk and aims to generate higher returns that just one single investment.
Give your pension a welcome boost
When you’re investing to protect your money and build up your savings for the future, make sure you’re making the most of what you’ve got. There are simple, tax-efficient investment products out there that can help you maximise your returns on your £75,000.
Brits reckon they need around £500,000 in their savings pot when they retire, according to new research from financial services provider One Family. This leaves savers with an income of just under £30,000 a year to play with.
Include the full state pension in the equation and this means the average Brit needs to save £364,000 for retirement. Investing £75,000 could help protect your financial security in retirement – depending on when you’ll want your money.
Even if you’re a few years away from retirement, this doesn’t mean you need to keep your money in cash savings. With Brits living longer, you can expect to need a retirement income for around three decades.
Thirty years is considered a long-term horizon in investment circles, so if you have other sources of pension income, you might want to consider investing your £75,000 to make it work harder. Make sure you speak to your investment adviser if you have any questions.
Tax benefits of a personal pension
Personal pension schemes have generous tax benefits attached to them. You’re eligible for tax relief on your pension contributions relative to your tax band.
If you’re in the basic rate tax band of 20%, you’ll pay just £8,000 for a total £10,000 contribution. A higher rate taxpayer will pay just £6,000 for the same £10,000 contribution, with additional tax payers paying just £5,500. These tax incentives can really help you build up your savings.
Savers can only put the equivalent on their annual salary into their pension each year to benefit from this tax relief, or £40,000 – whichever is lower.
If you earn £50,000 and haven’t contributed anything to your pension this year, you might want to put £40,000 in your pension and look for other ways for your money to go further.
Tax benefits of a stocks and shares ISA
A stocks and shares ISA is another simple and tax-efficient way to protect and grow your £75,000 for the future.
When you invest money, you could be eligible to pay tax on any profit above your annual allowance when you sell your investments. If you invest in an ISA, you won’t pay a thing.
You can invest £20,000 in your stocks and shares ISA each year and all your profit, whether from capital gains or income, will grow tax free within your ISA wrapper.
The ISA allowance resets annually, however, so it’s a case of use it or lose it as it won’t roll over into the next financial year.
ISAs are more flexible than pensions; whilst you can only start withdrawing from your pension from the age of 55, changes to ISA regulation means you can withdraw and pay in money to your stocks and shares ISA without it affecting your annual allowance.
At Moneyfarm, we know flexibility is key for many families so ensure you can get your money back in under seven working days.
An ISA can help you protect and grow your money in a simple and efficient way, and can be a useful supplement to your pension income throughout retirement.
Five tips for investing £75,000
- Make sure you have a rainy day fund and have paid off expensive debt
- Invest in the right way for you – At Moneyfarm we match you to an investment portfolio that’s built and managed specifically for your investor profile
- Manage risk with diversification – Aim to offset losses with gains made elsewhere. This can be expensive to do yourself, but exchange traded funds (ETFs) can help – these are the products Moneyfarm use to build their portfolios.
- Top up your pension – Give the future you a helping hand and make the most of any tax relief to maximise your pension income
- Make the most of your ISA – Invest £20,000 a year and watch your investments grow tax free – whether from capital growth or income.