There are several key considerations you should factor in when assessing what to do with a large lump sum:
Don’t let your lump sum ‘rot’
Interest rates have risen over the past year but are still below the Bank of England’s average inflation forecast of 8% for 2023. The spending power of cash savings erodes when inflation is higher than the interest that is earned.
Tip: A diversified investment strategy has the potential to beat inflation over the long term, if you can tolerate the ups and downs that are a natural part of investing. Keep cash for emergencies. Typically this should be three to six months’ expenditure if you are working.
Understanding investment risk and volatility
Volatility is a natural part of investing and can be useful, as it allows an organised investor, or an investment manager, to rebalance a portfolio, ensuring that it stays true to the original asset allocation and risk profile. Taking excessive investment risks should be avoided at all costs, as this can result in you losing all of your original investment. Exposure to risks can be reduced via diversification, the process of spreading your money across different asset classes by geography and sectors.
Tip: Evaluate the pros and cons of paying down your mortgage debt, investing the money, or a combination of both. A lower mortgage can reduce total interest costs, but may limit access to capital and concentrate more of your wealth in property.
Optimise tax breaks
Make the most of tax allowances. ISAs allow for tax-free investment growth and easy access, with annual subscriptions of £20,000 per adult. Contributions into a pension can reduce your income tax bill, but pensions are ringfenced until age 55 (57 from 2028). You may be able to top up a pension with a large lump sum payment, depending on your use of annual allowances in the past three tax years.
Watch out for fees
Even a relatively small difference in annual investment fees can have a major impact. In the illustration (below) there is a £160,000 difference after 20 years between the lowest-cost solution with annual fees of 1.55%, and the highest-cost solution with 2.30% fees.
Do you need help with your investing strategy? Call 03300 564 446 or get in touch via our contact form to learn more about Lumin’s investment services.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
