Three Ways to Invest £10,000

Jennifer Birtles 20th Jun 2020 4 Comments

Reading Time: 6 minutes

There are so many ways to invest a lump sum of £10,000, it can often be confusing to know what to do. Let’s take a look at three of the most popular choices for investing.

The three main investment options you have for a large sum of cash are savings, stocks and shares, and pensions. All of these have long-term benefits but depending on your needs and current financial situation, one may be more suited to you more than others.

Invest in Savings
Stocks and Shares
Top Up Your Pension Pot
How a Windfall Affects Benefits
More Useful Reading

Investing in Savings

This is considered the simplest and safest way to invest your cash. Anything up to £85,00 with one banking group is protected by the Financial Services Compensation Scheme (FSCS). So, there’s no risk of you losing your money if that bank goes bust. Just make sure if you do have more than £85,000 it is spread out in various banking institutions and then you know you’re covered. Lots of banks are owned by others – such as First Direct and HSBC. The FSCS covers banking GROUPS not individual banks – so make sure you know who owns your banks.

If you are looking to put your money away for a shorter time-frame (less than 5 years) then a high-interest savings account is the best option. Stocks and pension funds usually see more progress over longer-term investments of over 10 years, but locking away money for that long isn’t suited for everyone.

Unfortunately, interest rates are appallingly low right now. Although it’s always a good idea to have some of your savings in cash, buying power of your money may diminish over time with inflation and poor interest rates.

If you’re interested in investing in savings, ISAs are the best way forward. You can save up to £20,000 a year tax-free and any withdrawals you make are also tax-free.

The 4 types of ISA are:

Cash ISAs

The most common type, cash ISAs typically pay more interest than an easy access savings account. You could get a higher rate through a regular saver, though. Cash ISAs also often have rules about how long your money must remain in the account before you can withdraw it.

Stocks and Shares ISAs

The money put into an equities ISA allows you to buy units in a fund or other investment assets. Unlike interest, there are no guaranteed returns. In these ISAs, you have the chance to make more than with a cash ISA. However, you could end up with less money than you paid in.

For more information check out our article Stocks and Shares ISAs: How to Pick the Best.

Lifetime ISAs

Designed for 18-39 year olds to put away money for a long time – either to buy their first home or for retirement. You can save up to £4,000 a year in a LISA and the Government tops it up with a 25% bonus of what you’ve saved (up to £1,000). However, you’re committed to putting your money away for a long time. You’ll lose the Government bonus AND pay a withdrawal fee if you take the money out for any reason other than buying your first home OR turning 60.

Innovative Finance ISAs

IFISAs are a lesser-known savings product. It’s riskier than other options, as your money is invested via peer-to-peer lending platforms, which means it’s not FSCS covered. However, you can only open an IFISA through an FCA-regulated organisation, which is highly regulated.

An IFISA lets you invest in higher-risk investment projects for the promise of greater returns. Your money goes into funds for businesses who can’t get traditional bank loans. For example, small contractors building just one or two houses often aren’t attractive customers for high street banks. A contractor working on fifty homes, however, means huge loans and lots of interest paid to the bank. IFISA funds could invest in these small projects – and you benefit from the returns. Learn more about Innovative Finance ISAs here.

Stocks and Shares

Stock market investments are a long-term plan. Although nothing is guaranteed, the longer you can invest the more likely you are to make money. Generally speaking, stock performs much better than bonds and cash savings. But, with greater potential rewards there is more risk involved. Before making any decisions or investments, consider your desire for risk and also your capacity for loss.

You can decide whether to choose which stocks to invest in yourself or hire someone else to do it for you. You also need to work out whether you want to invest in individual stocks of a specific company or invest in funds which are a compilation of various stocks.

Diversifying is the best way to manage any risk so the second option may be best for starting out. This helps mitigate the effects of downturns in separate markets. If you are not managing the investments yourself then make sure you minimise any fees you are paying. Look for anything that charges 0.75% or below, you shouldn’t be losing out on too much potential profit this way.

For more help, read the many stock market trading articles in our Investments section.

Case study

If you’re still not convinced that anyone can make money on the stock market, take a look at Ney Torres. He was fascinated by Warren Buffet’s success (and strategies) from a young age – so this year, he decided to act on a Buffet quote to try it out. Years ago, Buffet said it was easier to make a profit on smaller investments than millions – because you can be more adaptable and take different risks.

Ney Torres took the 50% challenge. He invested $20,000 in dark companies in January – and made a 56% return within 9 months. This goes to show that – with some research – you can make great returns even with small investment sums.

Top Up Your Pension Pot

Investing in your pension pot isn’t what most people think of when working out what to do with a large sum of cash – but it is well worth considering. There are similarities to investing in stocks and shares, where pension providers offer a range of funds that you choose from. Choose between broad investment strategies that are suitable for most people or pick individual investments yourself, although it’s always wise to consult an independent financial adviser before doing so.

Pensions are a good way to invest your money as you receive tax relief on anything you put in. If you can afford to leave the money for a long period you will earn a decent amount in compound interest too.

Private Pension

Private pensions can be taken out in addition to workplace pensions, the only difference is that you’re not receiving employer contributions into it. You can have a couple of different pension pots but the total you can put in each tax year is £40,000. Having at least two pension pots is a wise move. Investing them differently helps balance out any losses you may go through.

Self-Invested Personal Pensions (SIPP)

These pensions give you the freedom to choose your own investments rather than selecting a ready-made portfolio, although you can hire an investment manager to make the decisions for you instead. These are generally much higher risk and best practice is always to seek advice from a professional first.

Disadvantages of Pension Investments

Investing a sum of cash into a pension fund means the money is locked away until you’re 55 with costly fees if you withdraw money earlier. As it’s still an investment there is a risk element, but similarly to stocks, if you are at least ten years from retirement age then long-term gains should outweigh losses.

A bigger risk with a personal pension is having an under-performing fund. Make sure you review your funds regularly to see how they are performing and make changes if you need to.

How a Windfall Affects Benefits

Means-tested benefits like Jobseeker’s Allowance, Housing Benefit, Income Support, and Universal Credit are affected by how much you have in savings. Bonds, property, stocks, and money in your current account all count as savings (or, ‘capital assets’ in the official paperwork).

If you have anything less than £6,000 in total, it doesn’t impact your benefits at all. Whereas if you have over £16,000 you aren’t eligible for any of these benefits. For every £250 you have over £6,000, a proportionate discount is taken off your benefits.

This means if you receive a windfall that pushes you over the threshold then your benefits could be reduced or stopped altogether. You also need to be careful about what you then do with your windfall, too. For example, if you give an inheritance to your children, so that you can carry on receiving benefits, this is ‘deprivation of capital’. Your benefits could be stopped anyway, if this happens.

However, sickness and disability benefits are not means-tested and therefore will not be impacted by a large sum of money.

Three Ways to Invest £10,000