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Capital at risk. All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in. Where we promote an affiliate partner that provides investment products, our promotion is limited to that of their listed stocks & shares investment platform. We do not promote or encourage any other products such as contract for difference, spread betting or forex. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK. Accurate at the point of publication.
Those with a £100,000 lump sum need to put serious thought and research into the best ways to invest it for the future.
Maybe you’ve received an inheritance, a windfall or bonus, or you’ve simply been saving over a sustained period of time. However you’ve come by your £100,000 sum, it’s important to put it to good use so it can grow and hopefully provide you with a substantial nest egg later in life.
Things to consider before you invest £100k
There are a number of things to think about before you start investing your £100,000 sum. You may want to get independent financial advice and work out a detailed financial plan, for example.
There is a standard checklist that most financial advisors will use. It is a useful summary of things to consider before investing:
- Is any tax owed on the lump sum? Depending on how you’ve arrived by your £100,000, there could be tax due on it. Seek advice and set aside what’s needed to pay the bill
- Have you got a rainy day fund? It’s sensible to hold a decent sum in cash in an accessible savings account for emergencies before you think about investing
- Have you got debts? Before investing it is important to review what debts you have, if any, and reduce or clear them. The most expensive debts tend to be on personal loans, car loans and credit cards, for example
- Is your income protected? Consider putting protection policies in place which would help loved ones if you died or were unable to work. Cover includes life and critical illness policies and income protection plans
- What about the mortgage? Using some or all of your £100k lump sum to pay off your mortgage could make financial sense, but this depends on your personal and financial situation, so it is a good idea to get independent advice.
How to go about investing £100,000
The way you’ll invest your cash is likely to depend on a number of factors including your attitude to risk, the time frame you have to grow your money and the access you’ll need to your cash, your financial goals and also your personal preferences when it comes to different types of investment.
But whether you have £10,000, £50,000 or £100,000 to invest, the principles of investing remain the same:
Risk: If you’re a first-time investor it’s important to bear in mind that no investment is guaranteed to rise in value. Markets rise and fall and your initial capital investment could drop in value, particularly in the short term.
This is why investments should be viewed as medium to long-term – which means several years rather than months – so that ideally you can ride out any dips in the market.
As a general rule, the longer your time frame for investment the greater risk you can afford to take with your investment, although all investors will have their own boundaries and limits for what they’re comfortable with.
Diversification: The old adage about not putting all your eggs in one basket is particularly true when it comes to investments.
With £100,000 to invest you’ll want to be sure you have a balanced and well diversified portfolio of different assets, splitting your money across a range of investments.
The aim is to smooth out your returns over time. When one particular investment or market may be performing poorly, this can be balanced by other areas of your portfolio that may be performing well.
Tax: With a large lump sum to invest you’ll want to consider tax-efficient investments to shelter your nest egg from tax. You could consider using up your £20,000 annual tax-free ISA allowance, for example, as well as other tax efficient ways to save and invest, including pension investment.
A wide range of different assets can be held within tax-free ISA wappers and self-invested personal pensions (SIPPs), including individual stocks and shares, equity and bond funds, property funds and even physical property in some cases, as well as cash.
Compounding returns: Compounding is the process of reinvesting your interest, returns and growth back into the investment (instead of taking your gains out) along with the principal amount so that you earn future growth on the full amount.
This has a snowball effect of leading to greater returns and growth over time. It is different to linear interest or growth, where only the principal sum invested earns the growth or interest.
Different ways to invest £100,000
Build a stock portfolio
If you’re after a do-it-yourself approach, £100,000 is enough to build a decent-sized portfolio of individual stocks. Compare online brokers to find one with competitive platform charges and a broad range of global stock options to suit your needs.
Online broker firms provide research and analytical tools so you can decide which stocks make the most sense for your level of risk appetite and your goals.
You could also consider using a robo-advisor, which will automatically invest for you based on your goals in exchange for a fee. Another option is to hire a financial planner or investment advisor for stock recommendations.
Pooled equity funds
There are thousands of pooled investment funds to choose from, including unit trusts, investment trusts and exchange traded funds.
You can choose from active or passive funds. Passive funds usually track a particular stock market, such as the FTSE 250, for example, while active funds will have a fund manager who is in charge of picking the individual stocks and other assets that make up the fund. Active funds tend to have higher charges.
When selecting funds you’ll also want to think about diversification, in terms of the industry sectors you invest in and the geographical locations of your investments. Ideally you might want a mix of different funds, some that invest in UK companies as well as others that invest in companies and assets around the world.
Bond funds
Bonds are a type of debt issued by companies and governments to investors. They pay a set interest rate on your deposit (known as the coupon), which is why they’re sometimes called fixed interest assets.
When you compare bonds, keep in mind that the safer the investment, the lower the interest rate and vice versa. If you buy bonds from the UK government, known as gilts, these are the safest type of bond investment as you’re guaranteed to get all your money back plus interest.
Corporate bonds tend to pay higher rates of interest – and generally the higher the rate the greater the risk. Bonds carry the risk that you might not get any interest on your investment, or even all your money back at maturity. You can check the credit ratings of bonds to see how safe they are before buying.
Bond funds and bond ETFs enable you to own a broader spread or mix of different types of bonds, which may diversify your risk.
Bonds are different to stocks and shares, and often when shares are performing badly, bonds may be doing better. This is why many financial advisors recommend investors have a mix of equity and bond funds within a balance portfolio.
Property
Depending on where you live, £100,000 (or even a proportion of it) could be enough for a decent deposit towards a property, either as a first home or a buy-to-let investment.
Keep in mind the cash deposit is just the beginning of the costs when you buy property. You would also have the ongoing mortgage payment, insurance, and maintenance costs to cover, as well as tax implications if it is not your primary residence.
If you don’t think you have enough or don’t want to commit that much upfront, you could consider investing in property through a fund or real estate investment trusts (REITs).
These are pooled or collective investment funds but for property. The fund combines your money with many other investors to build a portfolio of (typically commercial) properties as well as shares in property companies. You’ll receive a share of the rental income from the fund and additional investment profits.
Pensions
WIth a £100k windfall you may want to put a lump sum into an existing pension plan or start a private pension, subject to its terms and conditions and annual pension limits (the maximum annual contribution into a pension to gain tax relief is £60,000 for 2023/24 tax year for most people).
Pension investing is particularly tax efficient as you’ll get tax relief on your contributions at your highest level of income tax. This can significantly boost your savings pot.
But bear in mind while the tax benefits on pensions are generous at the point you invest, pensions tend to offer less flexibility, compared to ISAs for example, as you won’t usually be able to access the funds until later in life.
Plan for the long term
As you consider how to invest your £100,000, keep a focus on growing your wealth for the long term. In other words, don’t be tempted to try to turn your £100k into £1 million overnight.
In chasing high risk investments you could run the risk of losing the considerable nest egg you’ve already built up. Instead, think about how you can steadily reach your financial goals over time.
According to the investment world’s ‘rule of 72’, if you earn 7% a year on your portfolio, you’ll double your savings in roughly 10 years.
