Whether you’ve inherited it or are basking in a lucky windfall, you’ve got £100,000 and don’t know what to do with it. Investing a lump-sum can be difficult, especially when it’s a lot of money, which is why it’s important you invest in the way that’s right for you.
It’s often thought that cash accounts are the safest way to build up savings, as they aren’t exposed to the ups and downs of the financial markets. Yet savers leave themselves exposed to the silent threat of inflation instead, which erodes the value of your money over time.
To offset the impact of inflation, you need to find inflation-beating returns. That’s difficult in such a low interest rate environment. Although the Bank of England hiked interest rates in August 2018 for the second year running, this time to 0.75%, the returns on cash savings accounts are still incredibly low, which makes the lives of savers difficult.
Imagine you put your £100,000 straight into a cash ISA with a return of 1.1%. After one year you would have £101,100. If the Bank of England managed to keep inflation to its 2% target – inflation has been above this for some time – the value of the initial £100,000 would have fallen to £98,000.
This means you would have needed to earn £2,000 just to retain the purchasing power of your money. If your earnings aren’t at least in line with inflation, the real value of your cash pot will consistently decrease year-on-year. You’d have needed even more to see that pot grow.
That’s why more savers are looking to the financial markets to protect their money and grow it for the future.
Before you start investing it’s important you’ve paid off any expensive debt and saved the equivalent of at least three months of your outgoings in an easily accessible cash account in case of an emergency.
Where to put £100,000 for the best return
Understanding your investor profile is one of the first steps to achieving your financial goals. As what you’re investing for is personal, the way you invest should be too.
By understanding what you’re saving for, when you’ll want your money, your personality and financial background, you’re able to build a portfolio that’s suitable for you and your goals.
This information makes up your investor profile, which should influence the way you invest and the makeup of your portfolio.
No matter whether it’s a healthy eating and fitness target, your dream career path or financial goals, the more suitable and personal a plan is to you, the more likely you’ll achieve it.
Your investor profile will essentially outline your attitude to risk. The riskier your investments are, the higher the return you can expect – although the further your investments also have to fall.
If you prioritise protecting the value of your money from inflation, you’ll sacrifice the potential for blockbuster returns over steady income and reliable growth. The more risk-averse investors will have a high exposure to bonds in their portfolio, whilst those who are after bigger returns will have a preference for equities.
It’s important investors’ portfolios reflect them. Investors could be missing out on essential growth if their portfolio is too safe, whilst a nervous investor who has a tendency to sell at the first sight of losses could quickly end up out of pocket.
Most investors fall somewhere in the middle as they look to diversify their investments to manage the risk in their portfolio.
How risky am I?
The longer you have to invest, the more risk you can take with your money, which means you can expect a higher return.
If you have a short-term time frame, you might not have enough time for your investments to recover from any short-term fluctuations should they arise. If you’ll need your money in less than 12 months, investing might not be the best way to protect your money.
Longer time frames also encourage you to ride out any short-term volatility, and avoid any potentially painful poorly timed trades. If you’re investing over a short time frame or are a nervous investor, you might be tempted to react quickly to any losses you see in your portfolio to protect yourself from any significant falls.
But trying to catch a falling knife can be painful, and you can end up missing out on the recovery, which can seriously weigh on returns.
Should I save into a Pension or an ISA?
Chances are, you probably don’t feel as confident as you might like about your financial security in retirement. Don’t worry, you’re not alone. Putting this £100,000 towards your pension could really help to take back control when it comes to your financial future.
How much you’ll need for your retirement depends on how you want to spend your time after you’ve waved goodbye to the rush hour commute – although it’s generally thought you need two-thirds of your final salary to maintain your standard of living.
If you want £26,000 a year, you’re going to need a pension pot of at least £520,000 when you retire. If you want more luxuries including long haul flights, you’re going to need £39,000, which is at least £750,000.
There are generous tax benefits to investing in a pension, as you can claim back tax relief relative to your income tax band. This means a basic rate taxpayer essentially pays £8,000 for a £10,000 pension contribution. If you’re a higher or additional rate taxpayer you can claim back even more through HMRC.
You can only put up to £40,000 in your pension each year, however, or the equivalent of your annual salary – whichever is lower. If you’re able to invest the full annual allowance, this still means you have £60,000 to play with.
Don’t forget to make the most of your ISA allowance. You can invest £20,000 in your stocks and shares ISA each financial year and any growth in the value of your investment and any income can build up tax-free. This really adds up over the long-term and can help you maximise your returns.
Stocks and shares ISAs are more flexible than pension products, as you can deposit and withdraw from your ISA numerous times in the year without it impacting your annual allowance.
As the ISA allowance resets annually, you can continue to top up your ISA at the beginning of each new tax year. It’s better to use your allowance as early as possible, as time is powerful when investing.
Not only does it mean your money is invested in the market for longer, but you can also maximise your returns with compound interest – when your returns are reinvested and earn their own returns.
Top tips to invest £100,000
When it comes to building your portfolio in line with your attitude to risk, it’s important to manage the risk in your portfolio. One way to do this is through diversification.
By spreading your money across investments, asset classes and geographies, you hope to offset any short-term fluctuations with gains made elsewhere in your portfolio.
Diversification sounds simple, but it’s difficult and expensive to get right yourself, which is why many prefer experts to do it for them.
When it comes to investing your £100,000, follow these five simple tips to maximise your returns.
- Scope out your investor profile
- Diversify your investments to manage risk
- Keep costs low to keep more of your money and maximise your returns
- Make the most of your pension and ISA allowances
- Invest for the long-term