You have £20K burning a hole in your bank account and you’re keen to invest it wisely.
The best way to invest £20k will be unique to each investor, but all want the same thing – a good return on their lump sum.
There are a number of excellent options available for a £20,000 investment.
Here are some of the most popular and common, and some of the pros and cons for each.
Investment bonds can be a great way to invest a lump sum. There is usually a higher minimum amount between £5K and £10K, so this will take up a reasonable chunk of the money you have to invest.
Most fixed-rate bonds are for a set term, and have penalties if you wish to withdraw funds, and some do not allow withdrawals at all.
Mini-Bonds are a little different.
They enable you to lend businesses money, acting a lot like an IOU. They usually have a 3-5 year term, with interest payments being made regularly.
When your term ends you will be repaid your initial investment, and receive any interest as payment into your bank account. The risk of any bond is that the company who has taken the funds could default.
Each company therefore has it’s own risks which need to be understood which mean that these products are for sophisticated and high-net worth investors.
Fixed Interest Savings Accounts
Fixed interest accounts enable you to invest money at a much higher rate of interest. The catch is that you have to leave your money in trust for a fixed period, and there is no way to get at it during that time.
The interest rates on fixed term accounts usually make it worthwhile, and they are generally a safe bet in terms of investments if protected by the governments FSCS.
If you’re looking to invest your full £20K in fixed term accounts, it’s possible to spread the money out over more than one institution to mitigate the (marginal) risks.
ISAs (Individual Savings Accounts)
In the UK, Cash ISAs are essentially savings accounts, but with a tax-free wrapper. Any interest on your savings are paid tax free, unlike regular saving accounts, and that can be very helpful in increasing the differential.
If you already have an easily available lump sum held as cash in an ISA, you may make the decision to look at other products which could offer a better return, or different types of ISA which are available.
One form of ISA that may appeal is an Investment (or Stocks and Shares) ISA, which has the same tax benefits as the Cash ISA. These product are best utilised when you want to invest your money for five years or longer.
As an extra bonus, some ISAs enable you to easily access your money at any time. They are potentially a good place to invest all of your capital if you want to play it safe.
The 2017/18 allowance for money placed in ISAs (both cash, and stock and shares combined) is £20,000, so it is possible to invest your full £20K using these accounts.
However, if you then withdraw any of these funds, you will not be able to reinvest into any other ISAs, as your allowance would be considered used for the tax year.
You may want to consider diversifying your portfolio slightly, however, and investing some of that cash elsewhere for a better return, depending on your financial situation.
Pensions are another tax-efficient option for an investment of this nature. If you’re on a higher-rate of tax they are especially beneficial, as the initial tax relief they provide will be at your marginal rate.
That being said, once you’ve invested money in pensions there’s no getting at it until the pension matures. Even so, you may wish to invest at least a portion of your £20K in a pension fund, or funds.
You might make your decision based upon your current pension payments, who manages your pension and your current age. If you are retired, then you certainly will not be looking at this option!
P2P Lending Investments
P2P lending, or Peer to Peer investment, involves lending your money to businesses or individuals via online brokers who match lenders with suitable borrowers.
The kinds of businesses involved in P2P lending are usually based online, and as such have very low overheads. They provide services at lower prices than more traditional financial institutions like banks.
Consequently, you can earn a higher return on your investment through P2P lending than you would get through savings, or investment opportunities offered by banks.
Stocks and Shares
Shares can be a lucrative investment. £20K is a relatively small amount of money to invest across a whole portfolio and it’s advisable not to put all your eggs in one basket.
Investing some of that cash in shares is a good way to diversify. You can further diversify by varying the types of businesses you purchase shares in, and the size of the companies you choose.
Income Generating Funds
If you’re looking to earn some income on your investment, income generating funds are a good way to do it. They do carry medium risks, so it’s advisable to secure some of your investment in a safer bet and use a reasonably small portion of your £20K to generate income.
If you don’t need the income immediately, you can take the initial funds generated and reinvest them. This will ensure that a small portion of your overall portfolio grows rapidly and continues to generate further income.