What is the best way to invest 20k?

Whether it’s an inheritance, a bonus, a gift or some savings you’ve accumulated, £20k is a substantial nest egg.

But what to do with it?

This guide talks you through options around investment strategies for you to decide what’s best for you depending on your goals and risk tolerance.

What are your investment goals for your 20k?

It is incredibly important to take a goal-based investing approach.

A lot depends on your investment objectives and attitude to risk.

You might want to prioritise reducing your debt or paying down your mortgage.

If you’d like to make a quick profit (and are equally prepared to accept a potential loss), you might be happy to take on higher-risk investments — such as stocks and shares — for potentially higher returns.  

Having an easily available rainy-day fund could be your priority, or perhaps you’re interested in making ethical investments that are in line with your personal values, in businesses that benefit the environment, sustainability or fair trade.

Alternatively, you might prefer to play the long game and pay the money into your pension.

Here, we take a look at some of the best ways to invest your 20k, and the pros and cons of each.

Pay off any debt

A good place to start is to consider clearing any debt you have. Interest rates have risen sharply recently, which means borrowing has become more expensive in some cases.  

Paying off any current debt can help to reduce your interest payments and improve your credit rating, so any future borrowing is cheaper. If you come into a large lump sum, consider paying off credit card debt, finance plans, or student loans first. 

If you have a mortgage, you could also consider making overpayments to reduce the annual interest depending on your terms. This also means you can reduce your mortgage term and be mortgage-free sooner.  

It’s worth checking, however, that your mortgage interest rate is higher than any savings rate you might be eligible for.

If you can earn substantially more interest on savings than you can save by overpaying on your mortgage, it might be worth putting the £20k in an ISA or savings account instead. This can be especially true if you have penalties or restrictions associated with any overpayments.

Set up an emergency fund

Redundancy, ill-health and urgent home repairs can all take an unexpected toll on our finances, so it’s worth having some savings put aside in case of emergencies.

Many experts believe you should have an emergency fund of between three- and six-months’ worth of living expenses set aside.

Depending on your dependents and typical outgoings, that sum will vary, but if you don’t already have an emergency fund in place, this might be the smartest thing to do with £20k. 

If you’re looking for a home for your cash savings, you have a few options. 

You can pay up to £20,000 into a Cash ISA each tax year. Returns on an ISA are tax-free, so you get to keep more of the interest you receive.  

An alternative to a cash ISA is a high-interest savings account.

These work in a similar way to Cash ISAs, but you any interest you receive is taxable.

However, due to something called the annual savings allowance, you can earn up to £1,000 a year in interest without paying tax. However, you’re a higher rate taxpayer, this allowance reduces to £500. 

Savings accounts are a relatively safe option – you have the security of knowing that your capital is secure, unlike investing in the stock markets.  The savings will hold their value and accrue interest, so as long as the interest rate is higher than inflation rates then you will be making a profit. 

Plus, if you have money in a bank or building society in the UK, you get up to £85,000 per person protection if the bank goes into liquidation.

Fixed-rate accounts often pay the highest interest rates, but you won’t be able to access your savings for a specified period.

If interest rates were to increase during that time, you wouldn’t be able to switch providers either. Instant-access savings accounts offer more flexibility but a lower return on your savings.

Invest in your pension

When you pay into a personal pension, you receive 20% tax relief, which works out as a 25% top-up on your contributions.

So, if you were to invest the entire £20,000 in your pension, you’d get a £5,000 top-up, bringing the total to £25,000.

What’s more, if you’re a 40% taxpayer, you can save an additional £5,000 in income tax. 

For this reason, adding to your retirement pot could well be the best investment for £20k, but only if you’re happy to lock up the cash until you retire. 

If you don’t already have a personal pension, such as a Sipp, it might be worth setting one up.

You can compare the options available using our handy online tool. 

Invest in stocks and shares

If you have no immediate need to access your £20k and you’re prepared to accept a degree of risk, you could consider investing in the stock market.

This minimum investment timeframe for investing in stocks and shares is at least five years. 

If you do decide to invest in stocks and shares, you can mitigate some of the risk by diversifying your investment portfolio.

This means buying shares in different types of companies and in different regions around the world.

That way, any low-performing investments are usually balanced by ones that are doing well.

By investing in a stocks and shares ISA, you can shelter any gains and dividend income from the taxman.

You can invest in both cash and stocks and shares ISAs during the tax year, providing your total contributions do not breach the annual £20,000 limit. 

If you’re new to investing, you might prefer to buy a fund, which means a professional fund manager selects your investments for you.

You should review your portfolio regularly with a qualified financial adviser to make sure your investments are still meeting your goals. 

Speak to a financial adviser

There’s no single ‘best’ way to invest £20k — what you decide to do with it depends on your investment objectives and personal circumstances. You may even decide to split your lump sum between two or more of the options above to mitigate risk and maximise your potential returns.  

If you’d like more advice on the best way to invest money, Unbiased can match you with an expert financial adviser who can provide investment recommendations that align with your long-term financial goals and needs.

If you found this article helpful, you might also find our article exploring whether 20k is a good salary informative, too.