Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing.

How you could invest a lump sum or inheritance

If you have a lump sum of money, for example from an inheritance, you may be unsure what to do with it.

What is a lump sum?

A lump sum is a usually a one-off single payment. This could be from an inheritance or business sale for example.

When is the best time to invest a lump sum?

The stock markets move daily which means if you plan to invest in equities it can be hard to know if you are investing when markets are low or at a peak. Our financial advisers usually recommend investing as soon as possible to allow you to benefit from any potential growth. They also recommend investing for the long term.

At Four Wealth Management, a Financial Adviser will look at your overall financial situation before recommending what you should do with your lump sum.

Below are some tips you could use when deciding what to do with a lump sum.

Make a financial plan

It can be daunting to decide what to do with a cash lump sum. At Four Wealth Management, a Financial Adviser will work with you to determine your short, medium and long term financial goals and can determine how best to invest the lump sum when helping you to achieve these.

Interest rates are at historic lows so leaving a lump sum in a bank account will mean your money is unlikely to be working as hard as it could be. Once you have enough money set aside for an emergency fund, you are likely to have the potential for greater returns by investing your money rather than leaving in a bank account.

Invest a lump sum into a pension

A pension is one of the most tax-efficient ways to save for your future. Any pension contributions you make qualify for tax relief of up to 45% from the government depending on your earnings. Basic tax relief of 20% will be automatically added, if you are a higher rate tax payer you must claim additional relief through your annual tax return. For example, if you are a basic rate tax payer and you pay in £300 per month, you will get tax relief of £75 per month.

In the 2019/20 tax year most people can contribute up to £40,000 per year (or 100% of earnings if lower) into a pension while taking advantage of the governments tax reliefs. If you use all of this allowance, you can carry forward any unused allowances from the previous three years.

From the age of 55, you can generally withdraw up to 25% of your pension fund tax free. A pension is also a tax-efficient way to pass on wealth to beneficiaries, in some cases pension funds can be passed on free from tax.

Use your tax-efficient ISA allowance

You should tax advantage of your £20,000 tax-free ISA allowance (2019/20 tax year), you can hold a mixture of cash, stocks and shares within an ISA. Any growth from investments in an ISA remain free from further liability to income or capital gains tax.

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Give some to charity

If you have inherited a large sum of money, you could choose to give to a charity that has a personal meaning to you.

Find out more about philanthropy

There are also tax benefits of giving to charity. Donating through Gift Aid means charities can claim an extra £25 for every £100 you donate.

If you leave 10% of or more your estate to charity in your Will, your estate will qualify for a reduced rate of Inheritance Tax.

Find out more about estate planning and mitigating Inheritance Tax

Leave some for your children

You could choose to give away some of your lump sum to a child or grandchild. A Junior ISA is a good way to save for your child’s future as they cannot access the funds until they are 18, the money could then be used to contribute to a house deposit or university fees.

You can contribute up to £4,368 into a Junior ISA in the 2019/20 tax year.

Find out more about saving for your children

If you wish to leave a bigger sum to a child, your Financial Adviser may recommend setting up a Trust.

Find out more about Trusts

Paying off debts

You could use a lump sum to better your current financial position by paying off existing debts. You do not have to pay off all of your debt, but should prioritise paying off debt with higher interest such as a credit card.

Paying off your mortgage is also another option you should consider as this could mean you pay much less interest in the long term. It is important that you check the terms of your mortgage before overpaying as you may be charged by your mortgage provider for overpayments.

Get Financial Advice before deciding what to do with your lump sum

Contact Four Wealth Management today for a no-obligation meeting with a qualified Financial Adviser to determine the best options for your circumstances.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank, building society or a cash ISA.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief generally depends on individual circumstances.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place and along with trusts are not regulated by the Financial Conduct Authority.

Enquire Now

If you have any queries or would like to arrange a face to face meeting with an adviser for a no obligation review of your personal finances, simply book a call back using the form below. Alternatively, you can call us on 0117 973 0500.

The Partner together with St. James's Place Wealth Management plc are the data controllers of any personal data you provide to us. For further information on our uses of your personal data, please see the Partner's Privacy Policy or the St. James's Place Privacy Policy.

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