Our guide to saving a lump sum
Investing a lump sum wisely can make a big difference to your future finances and where you put it can have a direct impact on its value.
Key takeaways
Fixed-rate bonds, savings accounts and cash ISAs offer security but you may get a higher return if you invest
Stocks and shares ISAs or other investments are riskier but may be better if you're pursuing a long-term strategy
Lump sums up to £120,000 in savings accounts, bonds and cash ISAs are protected by the Financial Services Compensation scheme
Tax may be due on the money, but this depends on where it’s come from, and where you decide to keep it
What is a lump sum?
The value of a lump sum can vary hugely from one person to another. It is influenced by individual lifestyle, financial obligations, and spending habits.
For some, a few thousand pounds might be a game-changer, while for others, it might take a six-figure sum to make a significant difference. Either way a lump sum represents a one-off amount of money, often given through an inheritance or a work bonus.
What savings account should I choose for my lump sum?
Upon receiving a large sum of money, before you book that dream holiday, it’s worth considering where the money should be held. A savings account is a common choice, offering a secure place to keep your money while earning a decent rate of interest.
There are several types of accounts to choose from:
Types of savings accounts
Easy access savings accounts
Easy access savings accounts provide the convenience of withdrawing your funds without notice. However, instant access accounts may not offer the best interest rates available.
Fixed rate bonds
Fixed rate bonds will pay you a guaranteed return if you're willing to lock away your money for a set period, such as 1 year to 5 years. You’re likely to get a higher rate of interest than with an easy-access account but there will be penalties if you want to access you cash before the fixed period ends.
ISAs
ISAs allow you to save up to £20,000 each tax year, with no income tax to pay on your returns. They come in various forms, including easy access and fixed rate accounts, of if you're saving for the long term, a Lifetime ISA could be worth considering.
What should I consider when choosing a savings account for my lump sum?
When you're deciding where to deposit your lump sum, it's vital, you consider your future financial needs. The following questions are worth consider:
Do you require quick access for an upcoming purchase like a house deposit?
Are you happy keeping the money in a savings account or would you prefer to invest it?
Will the money go towards your retirement fund?
Could you use it to pay off existing debts or to overpay your mortgage?
How much interest could the money earn?
Do you have any financial dependents you may want to gift the money to?
How to get the highest rates of interest for your lump sum
If you’re putting the money into a savings account, you’ll want to earn as much interest as possible. The following tips can help you to maximise your interest:
You will often earn more interest with a fixed-rate account, but this won’t be suitable if you need to access the cash
Consider the terms of the account. Sometimes, longer-term commitments can lead to better returns, but this isn't a universal rule.
You don’t need to put all of the money in one place, it might make sense to split it across several different accounts.
Have you taken advantage of your tax-free ISA allowance?
Stay vigilant for interest rate changes, especially after introductory periods, and be ready to transfer your money if the interest rate drops
For larger sums exceeding £120,000, it's wise to diversify your savings across different financial institutions to benefit from the Financial Services Compensation Scheme protection
Is it better to invest a lump sum?
It’s a personal choice whether you keep your money in cash accounts or you invest in the stock market. For those willing to take on more risk for the potential of higher returns, investing a large sum is a one alternative to savings accounts.
However, it's crucial to remember that investments can fluctuate in value, there are no guarantees, and there's the possibility of ending up with less than you started with.
Options for investing a lump sum payment
Stocks and shares ISAs
A stocks and shares ISA offers tax-free investing, up to the annual ISA allowance of £20,000 per year. It's worth exploring for those who are comfortable with the risks associated with the stock market.
Investing in property
Investing in property is another option. However, it comes with its own set of considerations, including the potential returns, the responsibilities of being a landlord, and the tax implications that accompany property ownership.
Before undertaking this route, you may want to seek professional financial advice.
Pension savings
If you don’t need the lump sum in the short term, you could consider putting some of it into your retirement fund. This could be added to an existing pension, for example, or you could set up a Lifetime ISA. With either of these options, look carefully at what the money will be invested in and check which tax breaks might be available to you.
A lump sum doesn’t have to go into one savings pot
If you're dealing with a particularly large sum, it's often a good idea to split it across various savings and investment vehicles. This not only provides a safety net but also ensures tax efficiency.
You could, for example, put some into an easy-access account where you can withdraw money without penalty, and some into a longer-term savings product, such as a fixed-rate account.
If you’re thinking about investing this is seen as a longer-term strategy so you need to be comfortable with investment risk and the fact you won’t have access to the money in the short term.
Is my money protection within a savings account?
The Financial Services Compensation Scheme (FSCS) offers protection for up to £120,000 per financial institution. This means if a bank were to go bust, this money would be safe. Before depositing money to an account, always double check it has this protection.
How much tax do you pay on a lump sum?
The amount of tax due on a lump sum will depend on where you’ve put it:
Pensions: Typically, up to 25% can be taken tax-free. But you should expect to pay tax on the rest, in line with UK income tax bands
Gifts: Inheritance tax may be a concern if the giver passes away within seven years.
Redundancy: In the UK, up to £30,000 of redundancy pay is tax-free, though non-cash benefits are also valued for tax purposes.
Lottery winnings: These are tax-free in the UK, as they're considered 'gambling'.
Personal Finance & Insurance Expert
Our expert says...
“A lump sum to one person could be £1,000 they’ve won in a lottery whereas for others it might be £100,000 they’ve inherited. The key to making the most of the money is to put it somewhere to earn interest or to invest it – if you’re comfortable with the risks associated with this. The main questions you should be thinking about are when you might need the money, how long you can put it away for, and what level of risk you are happy with.”
Other useful guides
For more detailed guides on safeguarding your savings, planning for retirement, and finding high-interest savings accounts, check out the following resources:
Compare savings accounts with MoneySuperMarket
It’s easy to compare savings accounts with MoneySuperMarket. Just check out our list of savings accounts ordered by the highest interest rate, then use the handy filters to find the right account for you.
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