The best ways to invest your lump sum wisely

Whether you want to use it to buy a house, put it towards your children’s education, or even simply save it for the future, there are a number of lump sum saving and investment options immediately available to you.

Thankfully, we’re on hand to break things down, so here is our guide on how to spend a lump sum wisely.

What is a lump sum? 

A lump sum is a single, large payment and can come from various sources, such as winning the lottery, inheriting or receiving a financial gift, or a redundancy payment or bonus. If you are over 55 years old, you can also withdraw a lump sum from your pension, depending on the terms of your scheme. This is rising to 57 from April 2028.

Receiving a lump sum can be a great opportunity to top up your savings or boost your long-term wealth by investing in an ISA or pension.

How to prioritise your lump sum? 

The best way to use your lump sum will depend on your personal circumstances and financial priorities. You should also consider the size of your windfall and how much risk you want to take.

If you don’t have savings, it’s a good idea to prioritise building a safety net. Most experts recommend keeping an emergency cash buffer of at least three months’ expenses. 

Once you have a sufficient cash reserve, you may want to explore longer-term investments, such as a stocks and shares ISA or a pension, to help grow your wealth over time.

Repaying debts 

A lump sum can provide a valuable opportunity to clear outstanding debts and ease financial pressure.

Some debts, such as credit card debt, can quickly begin to multiply when not repaid on time, so oftentimes, the first priority is to resolve any outstanding payments that you may have. 

If you’re looking to take control of things like credit card debt, lump sums can go a long way towards improving your financial situation and relieving a lot of stress.

How to invest a lump sum 

Investing a lump sum in stocks, shares, or bonds is a popular way to build long-term wealth, especially for those comfortable with higher risk. Investments tend to outpace inflation over time but carry more risk than cash savings, as returns are not guaranteed. 

While higher risk can lead to higher returns, it’s important to invest only in what you're comfortable with and in assets you understand.

Stocks and shares have the potential to outperform cash in the long run but are more volatile, with values fluctuating. Experts recommend investing in them only if you don’t need to access your money within five years, allowing time to ride out market ups and downs.

If you need access sooner, a savings account might be more suitable.

Diversifying your investments is key to spreading risk across various assets and investment classes. You can also invest in funds, such as index trackers, which automatically diversify your investments.

One option is to split your windfall, investing part in stocks and shares and keeping the rest in a cash savings account. 

A financial adviser can assess your circumstances and provide tailored advice on where to invest based on your goals, risk tolerance, and financial situation.

Learn more: what is CFD trading?

Build emergency savings 

However you choose to invest your lump sum, it is vital to build an emergency savings pot.

Typically, an emergency savings pot should cover about three months' salary and be quickly accessible so you can use it whenever you need it.

These kinds of savings will cover you in case of unforeseen circumstances, such as redundancy, illness or an unexpected bill.

Always check with your employer about its workplace illness policy and eligibility criteria, but having emergency savings to support you in times of need will give you more peace of mind.  

Saving with a savings account 

If you want to boost your emergency cash buffer or need to access your cash in the next five years, a simple savings account might be the better option for you.  

Cash savings accounts are always popular with people who want to put away a lump sum and earn guaranteed interest on their savings. 

Banks and building societies offer many options, including easy-access and fixed-rate savings accounts, notice accounts and cash individual savings accounts (ISAs).

Each type offers different benefits depending on your need for flexibility, and how much interest you earn can vary significantly.

Saving with an ISA 

ISAs are a good way to save and protect any interest payments from tax.

There are a number of different ISAs available for different savings purposes, and each can involve different kinds of financial products and savings amounts.  

You could put your lump sum into an individual cash ISA, where you can earn tax-free interest on up to £20,000. 

If you're aged 18 to 39 and saving for your first home, a Lifetime ISA (LISA) could be a great option to consider. 

A LISA allows you to put up to £4,000 a year into a savings account. The government will add a 25% bonus to your contributions, up to £1,000 per year.

For example, if you contribute £4,000, the government will add £1,000, giving you a total of £5,000 in your LISA for that year.

Lifetime ISAs were introduced with the explicit intention of helping 18-39-year-olds save towards their first homes.

You can withdraw cash from a LISA to buy a first home or when you turn 60. If you need to withdraw cash at other times, you will face paying a 25% penalty.

So, if buying a house is your goal, this type of ISA is a good option. There are also junior ISAs that can help save money for your children’s future. These ISAs let you save up to £9,000 a year and can only be withdrawn once the child is over 18.

If you're looking at making potentially larger gains (but at an increased risk), you could also consider investing in a stocks and shares ISA.

Whether you’re looking to invest or save your lump sum, having a financial windfall at your disposal can help clear debt, buy your first house or save for your children’s future.

Seek financial advice

Investing, saving and building for your future is important, so it’s vital that as you’re making decisions about your financial future, you have the right advice.

Unbiased can quickly connect you with a qualified financial adviser who can help you reach your future goals.