The Best Way to Invest £40k

If you have £40,000 to invest, you may be wondering about the best way to make the most of your lump sum.

Where you decide to place your cash will depend on whether you are likely to want immediate, no-penalty access to your money, and also on your attitude to risk.

Bear in mind that if you can leave your money invested for a long period of time without touching it, you will be able to gain a higher interest rate on your money.

Here are a few options you could consider when deciding where to invest your money.

Investing £40k into Stocks and Shares

If you want to make the most of your money and are considering a longer term investment, it might be worth putting your cash into the stock market.

This is a more risky option, but it is potentially more rewarding.

By placing your money into a low-cost FTSE 100 index tracker, you could expect an average growth of 5% each year after inflation. Clearly, this would potentially yield a great return if you left your money invested for a period of a few years or more.

Typically, the charges for tracker funds are quite low, for example, Fidelity Index UK has an annual cost of just 0.06%.

You can also use your stocks and shares ISA allowance to invest in stocks and shares tax-efficiently, meaning that your money will grow free from capital gains and income tax.

However, remember than the ISA allowance is now £20k, per year. So you’d be able to use half of your forty grand in an ISA, and possible invest the other twenty grand elsewhere.

If you still wanted to invest the full £40,000 lump sum into your stocks and shares ISA, you could always hold the £20k as cash in a savings account until the next financial year, when your ISA allowance will reset.

Always remember that the stock market can be unpredictable and investments can go down as well as up.

Investing £40,000 into Your Personal Pension Plan

Another option for your £40k could be to put it into a personal pension plan, meaning that you would be able to claim tax relief on your contribution.

Tax relief would be worth 40% for higher rate taxpayers and 20% for basic rate taxpayers.

Your money can grow tax-free in a pension, but there is the drawback that you would not be able to withdraw it until you reach at least age 55. Although this could feel rather restrictive, it will stop you from raiding your nest egg when you’re short of cash.

When you retire and have access to your pension funds, you will be free to spend the money on whatever you like. The first 25% of any withdrawal will be tax free.

For most people, £40k is the most you can pay into a pension in a single year. If you earn less than £40k you’ll be able to invest up to your yearly salary amount.

For high earners. who earn over £150k per annum, the yearly allowance tapers. It  is worth understanding this as you’ll lose the tax breaks which are available.

Investing £40k into Bonds

If you don’t want access to your cash in the short-term, you could consider investing in investment bonds.

Bonds can attract a decent rate of interest but are typically used for time periods over five years.

If you do need to release your money before the end of the term, you can do so, but it will cost you money in charges and lost interest.

In conclusion

There are a number of options available to you when considering how to invest your lump sum of £40k. It’s recommend to consult an FCA approved financial adviser before investing your money if you have no experience of financial products.

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Last updated: August 3rd, 2017

Naomi Gould

Naomi was born New York and grew up in London learning to observe how businesses and finance works from her Father. Naomi now lives in the Surrey Hills and explores at weekends on her road bike.

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