Suzy Thomson, Investment Manager and Associate Director at RBC Brewin Dolphin, details what you should think about after receiving a lump sum of money.
-
Some Courier online content is funded by outside parties. The revenue from this helps to sustain our independent news gathering. You will always know if you are reading paid-for material as it will be clearly labelled as “Partnership” on the site and on social media channels,
This can take two different forms.
“Presented by”
This means the content has been paid for and produced by the named advertiser.
“In partnership with”
This means the content has been paid for and approved by the named advertiser but written and edited by our own commercial content team.
Receiving a lump sum of money, for example from a house sale or bonus, can potentially create exciting opportunities and long-term financial security for you and your loved ones. However, knowing where to put a cash windfall can be difficult, particularly in times of market and economic uncertainty.
The right approach for you will depend on what you want to do with your money as well as your needs and goals, which we can help you assess. In the meantime, here are some of the main options to consider.
Cash savings account
A cash savings account is a good choice if you want to use your lump sum to fund short-term goals such as a holiday, or if you’re not sure what to do with it. By holding your lump sum in a cash savings account, you won’t run the risk of your money falling in value just before you need to access it.
If you don’t need your money for several months, a notice or fixed-term savings account may offer higher rates than easy-access savings accounts. It’s always worth shopping around to find the best rate on your savings.
UK government bonds
If you want to fund a medium-term goal, UK government bonds (‘gilts’) could be an attractive choice. Gilts are secure savings vehicles that are guaranteed by the government and listed on the London Stock Exchange.
Gilt interest is taxed as income. However, they’re completely free from capital gains tax (CGT), which means you don’t have to pay CGT on any profits you make when you sell or redeem the gilt. This is particularly useful for higher and additional-rate taxpayers, who would otherwise pay CGT at 24%.
Stock market
For longer-term goals, such as retirement or passing wealth onto the next generation, you may wish to invest some of your money in the stock market. Although the stock market is volatile, history shows that it tends to outperform cash and bonds over long periods. You should be comfortable committing your money for at least five years, ideally longer. This will hopefully give your investments time to recover from any stock market downturns.
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 is because different assets, sectors and regions tend to perform differently to one another in a range of market conditions.
Investment ISA
Investing your lump sum in an Investment Individual Savings Account (ISA) will give it the opportunity to grow over the long term, while also shielding it from CGT and income tax. If you sell investments outside of an ISA, you could be taxed on the profits you make above your annual CGT exemption. And 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 annual allowance is currently £20,000. It’s a ‘use it or lose it’ allowance, which means you can’t carry it forward from one tax year to the next.
Pension
You can invest up to £60,000 or 100% of your UK relevant earnings (whichever is lower) into pensions each year and benefit from income tax relief, up until age 75. Income tax relief provides an immediate boost to your personal pension contributions, helping to enhance how much money you have at retirement.
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.
Next steps
Knowing how to make best use of a lump sum of money isn’t always straightforward. At RBC Brewin Dolphin, we’ll help you understand which types of savings and investments suit your individual needs and goals, so you can feel confident you’re making the right decision with your money.
Find out more at RBC Brewin Dolphin’s website.
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Investment values may increase or decrease as a result of currency fluctuations.
RBC Brewin Dolphin is a trading name of RBC Europe Limited. RBC Europe Limited is registered in England and Wales No. 995939. Registered Address: 100 Bishopsgate, London EC2N 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.
Conversation