With so many different savings accounts to choose from, it can be difficult to know where to invest a lump sum of cash. This guide takes a detailed look at your options to help you make the right choice.
Key takeaways
There’s a wide range of different account options.
If your lump sum is quite large, you might end up paying tax on the interest you earn.
If you want to put your money away for a longer time to earn a higher rate, choose a fixed-rate bond.
What is a lump sum?
A lump sum is simply a large chunk of money paid in a single payment rather than lots of smaller ones. It could be a few hundred or thousand pounds.
There are reasons why you might have a lump sum to pay into a savings account. For example, you might have:
Inherited some money
Sold a property
Received a bonus at work
Received a redundancy payment
Received a large gift
Long-term ambitions with the lump sum
Knowing where to invest a lump sum isn’t always an easy decision to make. But thinking about your future plans and ambitions is a good place to start. Consider whether you would be able to cope without this money for a few years or if you would prefer the flexibility of getting access to it if needed.
For example, if you’re planning to buy a home in the next year or 2, it’s better to keep your money in an easy access savings account or a short-term fixed rate bond such as 6 months or 1 year. These enable you to withdraw your money again in the near future and use it to put down your house deposit or pay for improvements.
However, if your savings goals are longer term – if you want to pay for your young child’s university fees or you’re thinking about your retirement – you might be better off locking it away in a long-term bond or even investing it in the stock market.
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If you’re investing over the long term, the stock market is likely to provide higher returns than leaving your money in a savings account. However, investing in the stock market is much riskier than saving in cash. The more risk you take, the higher the potential returns, but you could also end up getting back less than you originally invested.
This means that investing is not a decision to be taken lightly. If you’re going to do it, be prepared to invest for at least 5 years, preferably longer. For this reason, it will only be a suitable option if you do not need access to your lump sum for a long time.
If you have a large sum to invest, you could spread the risk by investing in a range of investments across different products and areas. But it’s always worth speaking to a financial adviser first. They can help assess your long-term goals and attitude to risk and pick the best investments for you. You can also visit our guide on investing for beginners.
However, if your savings goals are shorter-term, you’ll be better off with a standard savings account. If need to withdraw your money soon, consider picking an easy access savings account. Shop around to find the one with the highest interest rate.
Interest rates are usually variable, but this can work to your advantage while the base rate is rising as your savings rate is likely to increase too.
Alternatively, if you can leave your funds locked away for 6 months to 5 years, a fixed rate bond is another option worth exploring. These accounts are ideal for lump sums as you can’t add further funds to your account during the term. Interest rates tend to be higher than for easy access accounts, but they are fixed. This means if the base rate goes up, you won’t benefit. You may not access your money during the term without paying a penalty.
If you want something in the middle, there are also notice accounts. These let you access your money provided you give between 30 and 180 days’ notice, depending on the account. Interest rates are typically higher than for easy access accounts.
Of course, there’s nothing stopping you from putting some of your lump sum in a savings account and investing the remainder in the stock market. This could be a good option if you might need to access some of your cash in the near future but can leave the rest of it untouched for a few years. It also reduces the amount of risk you’re taking.
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When seeking the best savings account for you, it’s important to keep the following points in mind:
Do you need to access your funds soon? You may want to choose an easy access savings account, a notice account or a short-term fixed rate bond.
Are you happy banking online? Many banks offer online banking options, but choose a local bank if you prefer to visit in person.
Are you likely to exceed your personal savings allowance? Basic-rate taxpayers can earn up to £1,000 in interest each tax year without paying tax. Higher-rate taxpayers can earn up to £500. If you go over this amount, an ISA might be a better choice as all earnings are tax-free. Just remember that you can only invest up to £20,000 in the 2024/2025 tax year.
What is the minimum deposit? Make sure you check as this can vary. Some accounts can be opened with as little as £1 while others might require an initial deposit of a few thousand pounds.
How risk-averse are you? If you’re happy to take on more risk, investing in the stock market has the potential to offer greater returns provided you invest over the long-term.
Is your bank protected by the FSCS? If your provider (and the activity they are carrying out for you) is authorised by the Financial Conduct Authority or the Prudential Regulation Authority, your money will be protected under the Financial Services Compensation Scheme (FSCS). This protects up to £85,000 per person per financial institution. If your lump sum is more than this, you can spread it across more than one provider. Note that some providers share the same banking licence so you’ll still only be protected up to £85,000 in total. Check the Financial Services Register and see which providers are linked in this way.
Interest rates can be higher if you have a lump sum to invest
You’ll usually have more savings options to choose from
Investing your money could lead to greater returns
Cons
You may pay a penalty if you withdraw your money before the term ends
Investment accounts are higher risk
Tax will be payable on any interest income outside an ISA that exceeds your personal savings allowance (£1,000 for a basic-rate taxpayer and £500 for higher-rate taxpayers)
Bottom line
If you have a lump sum to invest, you have a wide range of savings options to choose from so consider your future plans with care. As a general rule, if you want to access your money within the next couple of years, a savings account will be the better choice. But if you can leave your lump sum untouched for at least 5 years, investing has the potential to offer greater returns.
Frequently asked questions
If you have a lot of debt to pay off, it can make sense to pay this off first, particularly as borrowing costs are rapidly rising. However, if you're thinking about paying off your mortgage, check whether you're likely to pay an early repayment charge first.
This depends on your personal preferences and circumstances. If you are likely to need access to your money in the near future, an easy access savings account or short-term fixed rate bond could work for you. But if you can lock your money away for a few years, a longer-term fixed rate bond or investing in the stock market could be a better solution.
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Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
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