When it comes to investing, there has never been so much choice. From ISAs and bonds to pensions and P2P lending, it can be confusing to know how to invest £15k.
This guide looks at several ways to invest £15k, revealing the pros and cons of some of the best investment options. The best way will always depend on your personal circumstances.
This investment option is the most popular type of ISA when it comes to sheltering savings and other other investments from income tax.
With a basic ISA, you are limited to investing a maximum of £20,000 as of April 2017, but any interest that you gain from a cash ISA is free from income tax.
Some of the best rates for cash ISAs pay up to 1.85% per annum, but this can vary depending on whether you choose a fixed or variable rate account.
Fixed rate ISAs are a safer option, with providers generally offering interest rates of between 1% and 1.85% fixed for up to five years. Variable rates usually rise and fall in accordance with the Bank of England’s rates, so you could make more interest, but you could equally make less or potentially lose money, depending on the state of the economy.
If you have managed to fill your ISA allowance, then other popular options are bonds, which could be fixed rate options and include higher risk corporate bonds as well as those protected by the FSCS.
It’s important to understand the current inflation rate and what your cash ISA is currently paying. It is always worth reviewing old ISA accounts which may be on a poor rate. It can be simple to switch the funds into a different account, but be aware of your allowance.
Fixed-rate bonds are an option for an investor with a lump sum who does not need access to the cash. Bond interest is known as a coupon and is most often paid either quarterly or yearly.
For those looking at the short term, there are 1 year fixed rate bonds available, but it’s usually possible to get better rates on longer terms.
Different types of bonds are regulated differently and have different levels of risk, so it’s worth reading and understanding each item in detail before making any final decision.
Stocks and Shares ISA
Stocks and Shares ISAs are similar to cash ISAs in the fact that you can save up to £20,000, but they have some key differences.
While cash ISAs gain interest based on fixed or variable interest rates, stocks and shares ISAs gain income through stocks and shares investments. It’s possible to invest in a fund, which picks the stocks for you, or you can purchase stocks directly.
Stocks and shares value can increase through equity growth, or pay income via dividends to investors. There are funds available that accumulate by reinvesting any income from dividends, and also those that can pay the cash into your account. Of course shares can also decrease in value, so it’s possible to lose money if you were to sell at a lower share value than you originally purchased it for.
This type of ISA is protected from capital gains tax (CGT), which is great if you exceed the annual CGT allowance of £11,100. This includes protection for any gains from selling shares, receiving dividends, and corporate bonds.
However, this type of ISA may be subject to fees from your account provider. Many platforms will charge you for using their service, which will either be a flat fee, or a percentage of your funds’ value.
You may also be charged for each stock or share you take out, which will range between 0.1% and 1% per fund. Selling and buying funds may also incur a fee, as will transferring to another provider or platform.
It’s important to think of a stocks and shares ISA as a long term investment, so it depends if you can foresee that you may need fast access to your 15 grand.
Regular savings account
Regular savings accounts can often be seen as a safe option, paying up to 2.25% fixed interest. You can also gain up to 1.05% per year if you require easy access to your funds.
Unlike ISAs, interest from your savings account can be taxable. However, due to the new personal savings allowance (PSA) introduced in April 2016, account holders who pay 20% income tax can earn £1,000 per year interest tax-free. Higher 40% rate taxpayers can earn £500 per year interest tax-free, while the highest rate taxpayers are not eligible for PSA.
Fixed savings accounts are ideal if you do not need regular access to your funds, as you will receive larger interest. If you need regular access to funds, you can open an easy access account, but this may not be ideal as you will earn much less interest.
Peer to peer lending (commonly known as P2P lending), is a fairly new investment option that puts your funds directly into any person that needs a loan. This type of investment can earn lenders up to 7% on their investment, but it doesn’t come without its risks. Due to these risks, these products are not protected the the UK government’s deposit protection scheme.
Like any lending, those borrowing money may not always be able to pay back the money owed, leaving lenders sometimes out of pocket. This may be too risky for you – it’s not everyone.
Your pension fund is a tax-free investment that you, your employer, and sometimes the government, pays into for later on in life. Every time you or your employer pays into your pension fund, the government will pay the equivalent amount of income tax back into your funds.
While £15,000 may seem like a lot of money to invest into your pension, you should receive an extra 20 to 45% extra from the government, depending on your income. On top of that, the sooner you invest, the more you will receive when it comes to your retirement age.
Investing £15,000 into a pension fund may not be ideal if you require access to your money, or if you prefer to see results sooner.
Any type of investment comes with risk. If you are unsure of your investments, expert advice should be found via an FCA approved financial advisor. The earlier you think about your pension, the better.
Hopefully now you have a better idea of how to invest a £15k lump sum.