How to invest 1 million pounds: what should you do with your money?

If you’ve saved or inherited £1 million, there are a wide range of investments you could make, from stocks and shares to property.

But which ones are right for you?

We take a look at the best ways to invest 1 million pounds below.

What are your investment objectives for your 1 million pounds? 

Your main priority to identify as you work out where and how to invest your 1 million is what you’re hoping to achieve. What is your investment objective?

When working with a financial adviser, your objective will be determined early on in your working relationship based on your financial goals.

To figure it out, they will ask you: 

• How important is it that your investments are ‘safe’? – How risk-averse are you, and does that priority rank above the desire to maximise your potential profits? Would you prefer to invest in more secure, steady areas?

• Would you like to increase your capital as much as possible? Is growing your wealth more vital to you than instant access to it? Do you have existing savings that will protect you in an emergency?

• Are you looking for the best way to invest 1 million for passive income? Is creating a second stream of steady income a priority for you? Are you willing to take on more risk to secure this sort of financial supplement?

• Do you want to reduce your tax liability? Are you concerned with investing in a way that keeps your tax liability low? Would you like your wealth to exist in a form that won’t be taxed where possible?

• Are you hoping to focus your investments on retirement/the long-term future? Do you plan to access your money now, or are you investing for retirement? Are you willing to lock off your money for the long term?

• Are there any other financial goals that might impact your objective? Do you want, for instance, to start a business? Are you gearing up for a big purchase? What else would your adviser need to know? 

Which investment products are available? 

Once you understand why you’re investing, you can look at where to invest 1 million pounds to support your financial goals and overarching objectives.

You might choose to invest in any or a combination of the following: 

• Your personal pension: You can benefit from a top-up from pension tax relief, but contributions are capped at £60,000 each year.

• Your workplace pension scheme: Again, you’ll get pension tax relief but can’t pay in more than £60,000 in any given tax year.

• Stocks and shares individual savings accounts (ISAs): You can invest a maximum of £20,000 each tax year.

• Stocks and shares (directly) 

When you’ve decided on where to invest, you can pick the type of investments you want to hold. 

Your options include the following:

• Investment bonds

• Unit trusts and open-ended investment companies

• Tracker funds, including exchange-traded funds (ETFs) and unit trusts

• Investment trusts 

The above investment options are direct or indirect, and in either category, you’ll find no guarantee concerning how your investment will perform. Even the safest investments come with some risk.  

If you want to make your money go as far as possible but don’t know where to start, speaking to an adviser is the best course of action.

Finance professionals are managing over £1.49 trillion in UK-based funds as of October 2024.

This is their area of expertise, and they will be best placed to help you select investments, considering factors you might not have and maintaining awareness of things such as effective asset allocation.

The importance of effective asset allocation

Whether you’re wondering where to invest 1 million now for income or hoping to put your 1 million in a fund where the sum can grow over the next ten years, you need to be aware of asset allocation.

In other words, you need to know what category your investments fall under to ensure you’re continually diversifying your portfolio and investing in multiple asset types.  

There are three major asset classes (listed in increasing order of risk): 

1. Cash (or equivalents like money market funds): The main risk is that your cash doesn’t keep pace with rising living costs as interest rates often lag inflation.

2. Investment bonds and gilts: These can vary in risk but are usually less volatile in price than shares.

3. Shares: These tend to fluctuate in value more than cash or bonds but often provide higher returns over time. Shares vary in risk, and holding a well-diversified fund or ETF can be a good way to minimise your risk.

Cash is often your best option if you’ll need access to the money in the next five years.

If you’ll need access in the next one to five years, you should choose lower-risk investments, generally staying within the cash and bonds classes.  

If you don’t need access for at least five years, shares might instead offer the best return on your investment.

According to a Barclays Capital Equity-Gilt Study, shares beat bonds in 80 per cent of all ten-year rolling periods over the last 100 years, making them the long-term investment with better odds. 

How to invest £1 million in your unique financial situation 

If every UK resident received 1 million pounds tomorrow, financial advice would differ considerably from person to person.

This is because each person would come into their money from a different starting point, which would be instrumental in identifying the best way to invest 1 million.

For example, if you’ve received a lump sum of 1 million pounds but don’t have any existing savings, you should keep some of this amount back and create an instantly accessible emergency fund for yourself.

An emergency fund is a way to prepare for unexpected expenses, such as a broken boiler or sudden redundancy, so they don’t knock you off your feet when they arrive.  

Try to get to a place where your emergency fund contains enough money to support you financially for at least three to six months, and you’ll be in a good position.  

It's also important to consider debt and how it will affect investment decisions.

The average total debt per UK household, as of October 2024, was £65,865, and the total figure for owed debt across the country went up by £2.56 billion from £1.86 billion at the end of September 2023, which is an extra £586.38 per UK adult over the year. 

In most circumstances, you’ll be better off paying your debts before investing, especially when dealing with high interest rates.

Prioritise paying off credit cards and payday loans, clear any overdraft debt, build that emergency fund and then think about how you’d like to invest what remains. 

Protecting your investments from tax

If you have a large sum to invest, it’s important to think about the tax implications of your decisions. Some cash savers pay income tax on interest exceeding £500 per year, potentially leading to a big bill. 

Likewise, investors in stocks and shares owe dividend tax on dividend income over £500 and could owe capital gains tax when they sell investments.

Using an ISA or pension can be a great way to protect your wealth, as interest, dividends, and capital gains within these accounts are tax-free. You can invest up to £20,000 per tax year in an ISA and up to £60,000 in a pension, subject to income limits.

Given the complexities of tax rules, seeking advice from a financial adviser can help you maximise tax efficiency and avoid potential pitfalls.

How does attitude to risk affect a £1 million investment?

As briefly discussed above, your level of risk-averseness could affect your overall objective and shape the sorts of investments that are suitable for you.  

The best thing you can do to determine your comfortable level of risk is to speak with a financial adviser and ask for all the information you need to make an informed decision.

Investing £1 million is a big decision, and no good adviser will push you to do things with your money that you aren’t happy with.

To connect with a great adviser today, get in touch with Unbiased.