I recently helped a friend work out what to do with a lump sum she’d inherited from her recently deceased relative’s estate. It got me thinking about how I’d “store” a lump sum and how significantly different the options would be based on what I wanted to use it for, and the timeframes involved. I thought I’d put together a few options that might be useful.
Short-term, you’ll need it in the next 12 months:
If you need to use the lump sum within the next 12 months, it needs to stay fairly liquid and accessible. Even if you’re going to use it for a house deposit as a first-time buyer, you shouldn’t put it in a Lifetime ISA as the LISA needs to be open for at least 1 year before it can be used. Consider not investing it as we recommend treating investments as a long-term option. Therefore, you’ve got a few choices:
- Put it in an easy access savings account- note the interest will be taxable, based on your income tax bracket
- Shield it from tax in a cash ISA- these have an annual limit of £20,000 across all your ISAs
- Purchase premium bonds as a secure and liquid place to store the cash. Any winnings from their monthly draws are tax-free
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Medium-term, you’ll use it in the next 5 years:
If you will need the cash within the next 5 years but not in the next year, a few more options open up for you. As well as the options above, you can afford to lock your cash away for a short period for a more favourable interest rate:
- A fixed-term savings account with limited access- note the interest will be taxable, based on your income tax bracket
- If you’re saving for the deposit for your first home, a cash Lifetime ISA might be a good option. You can save up to £4,000 per year and the government tops it up by 25% to £5,000. A couple of things to look out for with LISAs; you can only use it for 3 purposes (buying your first home, retirement or terminal illness- otherwise you pay a 25% fine of the total balance), and there is a limit on the value of the home you can buy (which hasn’t stayed in line with the rise in house prices).
- Offset mortgage: you can keep your lump sum in an accessible account but your mortgage is offset by that figure, so you don’t pay interest on the balance you have in that account. You can access that money if you need, the amount withdrawn is added back to your mortgage, so you pay interest on it.
Long-term, you don’t need to access it for 5+ years:
If you can squirrel away the money for a longer period, along with the above options, you can have a look at:
- Investing! Using a Stocks and Shares ISA/LISA- £20,000 limit across all ISAs per tax year, including the max £4,000 deposit limit in the LISA
- Investing it in a Self-Invested Personal Pension (SIPP)- bonus that you also get tax relief on this. You will need to make sure this doesn’t exceed your Annual Allowance. You won’t be able to draw down the funds until retirement age, so this is a very long-term plan.
- General Investment Account: not tax-efficient but if you exceed your ISA allowance and adding anymore to a SIPP would exceed your Annual Allowance, you can still invest using a GIA- note any interest and dividends are subject to tax and you’d have to pay capital gains tax when selling the investments for a profit.
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