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 simply save it for the future, there are numerous lump sum savings and investment options 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, receiving a financial gift, or a redundancy payment or bonus. 

If you are 55 or over (57 from 2028), you can also withdraw a lump sum from your pension, depending on the terms of your scheme, and you can take 25% tax-free. 

Depending on your circumstances, a lump sum can be a great opportunity to top up your savings or boost your long-term wealth by investing.

However, if you are contemplating making a lump sum withdrawal from your pension, it’s particularly important to get financial advice first.

Unless you have a plan for the money, you may be better off leaving your money invested for longer or withdrawing money from other accounts.

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 the level of risk you want to take.

If you don’t have savings, it’s a good idea to prioritise building a safety net. Experts recommend keeping an emergency cash buffer of three to six months’ expenses, longer if you’re already retired.

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

Using your lump sum to repay debts

A lump sum can also provide a valuable opportunity to clear outstanding debts and ease pressure on your income. Some debts, such as credit card debt, can quickly begin to multiply if they aren’t repaid promptly.

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.

Alternatively, paying a lump sum off your mortgage can save you thousands of pounds in interest and knock years off your loan.

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 some 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.

How long to invest a lump sum for

Stocks and shares have the potential to outperform cash in the long run but are more volatile, with values fluctuating.

For this reason, experts only recommend investing in them if you don’t need to access your money within five years. This will give you time to ride out market volatility.

If you are likely to need your money within the next five years, a savings account might be more suitable.

Why diversification matters when investing a lump sum

To reduce the risk of investing, it’s important to spread risk across various assets and investment classes, which is called diversification. 

Investing in funds, such as index trackers (rather than individual shares), will automatically give you some diversification.

Some funds can also be a ‘one-stop shop,’ giving you access to a globally diversified portfolio of shares and fixed-interest investments like corporate bonds to balance risk.

Should you split your lump sum between investing and saving?

If you are wary of investing too much in this way, you can 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 with your lump sum

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

An emergency savings pot should cover at least three months' salary (if not more) and be quickly accessible so you can use it whenever you need it. For this reason, look at the best paying easy access accounts rather than notice accounts or fixed rate savings.

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. 

Choosing the best savings account for your money

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 accounts, fixed-rate savings accounts and notice accounts.

All of these options will be available as cash ISAs, enabling you to shelter your money from tax.

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

Saving with an ISA to protect your lump sum

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.  

Cash ISAs

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

From April 2027, the annual cash ISA limit will be cut from £20,000 to £12,000 for under-65s, with £8,000 allocated for investment in stocks and shares. Savers over the age of 65 will not be impacted, so they can continue to save up to £20,000 each year in a cash ISA.

Lifetime ISAs

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 just need to be aware that you can only use them to buy homes worth up to £450,000.

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 (meaning you lose your bonus and some of your savings).

Junior ISAs

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 18.

If you have longer-term savings goals and you are happy with a degree of risk, you could also consider investing in a stocks and shares ISA.

Whether you’re looking to invest or save your lump sum, a financial windfall can help clear debt, buy your first house, save for your children’s future or increase your own long-term financial security.

Get expert 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.