Learn The Best Way to Invest £5K

Updated: December 11th, 2018

If you have £5,000 to invest, you may be wondering how to make the most of your lump sum and get the best return.

Where you decide to place your windfall will, to a large extent, depend on how accessible you want your money to be, your financial situation and your attitude to risk.

You will also need to consider how long you plan to invest your money for, as with some options, the longer you leave your money invested, the higher the interest rate you can secure for your money.

Find Out the Best Way to Invest £5k which is right for you.

Here are some of the options you could consider when deciding where to invest your money.

Save £5,000 in a Tax-Free ISA

An ISA is basically a tax-free savings account, but there are different types.

Until 5 April 2018, you can invest up to a maximum of £20,000 per year, which is an increase in the amount which could be saved tax-free in previous years.

This can be in a cash ISA, an innovative finance ISA, a stocks and shares ISA, a Help to Buy ISA or a combination of all of them, all included in this £20,000. Note that any unused allowance doesn’t roll over; once the tax year changes, you lose the allowance.

If you are saving for your first home, then look into using some of this money (up to £4,000) in a Lifetime ISA. The Government will top up these funds by 25%. The money will be need to be used for a deposit on a first home or for retirement.

If investing for the long-term, you can gain considerable tax breaks by investing in a stocks and shares ISA. You will pay no capital gains tax on any profits that you make from increased share values, interest earned on bonds or any dividend income.

Current best ISAs for £5k.

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Investing £5k in Fixed-Rate Bonds

A bond is basically an IOU that may be traded in the financial markets. The most commonly used type of bond involves two forms of payment by the borrower to the bond holder.

A final payment is made to the investor when the bond ‘matures’ after a predetermined fixed term. A smaller stream of payments (coupons) is also forthcoming, usually twice a year, for the life of the bond until it matures, forming a fixed percentage of the final maturity payment.

Mini-bonds usually have short terms of between three and five years. Fixed rate bonds are taken out with a set rate of interest, which doesn’t change during the life of the bond, regardless of the prevailing Bank of England base rate.

  • Fixed rate bonds could be an option if you have used your ISA allowance.
  • Tax: It will depend on the interest rate if your return is higher than your personal savings allowance.

Compare Fixed-Rate Bonds in the UK

View the Top 10 & Apply Online

Current Bank or Building Society Accounts

If you want the convenience of instant access to your cash and you don’t want to tie it up for a lengthy period of time, you could simply put it into an ordinary current bank or building society account.

Many current accounts pay low interest rates, provided that the account remains in credit and you pay a certain amount into the account each month. There are specialist current accounts now available which can pay out higher rates if you meet certain criteria.

Peer-to-peer Lending (P2P)

Peer-to-peer lending websites work in most cases by connecting investors to customers who require loans and allowing investors to act as the bank, providing a small percentage of funds to multiple borrowers. There are many variations on this model so it is wise to do your homework on each to find out which suits you.

As an investor, you would receive an income each month made up of interest and loan repayment.

Stocks and shares

Stocks, shares, and equities are essentially the same thing. When you purchase a share, you are investing in part of a company and you become a shareholder. The idea of investing in stocks and shares is that you buy at an attractive price, and then sell your stock when the price has risen, leaving you with a profit.

You can buy stocks and shares online or you could use the services of an experienced broker. One crucial thing to bear in mind when investing your money in stocks and shares is that their value can go down as well as up, potentially leaving you with a loss on your investment. For this reason, stocks and shares should not be used as a short-term  investment vehicle.

Pension plans

Basically, a pension is there to provide an income once you’ve retired.

The UK has three main types of pension: the state pension (paid for by the government), salary-related pensions (paid for by some employers) and money-purchase pensions (paid for by you and/or your employer).

To provide an incentive for people to save for their retirement, the government offers a tax break.

As long as your pension scheme fulfils certain criteria, you won’t be taxed on the money you invest in it. Simply put, for every £78 you pay into your pension, the government will contribute at least a further £20.

If you pay the higher level of tax, you are allowed to claim back 40% as pension tax relief.

This means that placing £5,000 in a pension is a tax-efficient long term investment, but then if you are young and may need to access the funds it might be best to fund pensions with smaller, regular amounts.

Although there is a wide choice of potential investment vehicles for your lump sum, most investment products can be complicated and it’s always recommended that you seek advice from an experienced, FCA approved financial adviser before you invest your money.

Courtney Lucas
Last updated: December 11th, 2018