Should you make a lump sum investment with a bonus or windfall?

1. Pay off debt

A central foundation of a healthy financial position is keeping debt under control. It could be an option to pay off any debt with a lump sum payment. You may have heard the terms ‘good debt’ and ‘bad debt’. 

Good debt might be a low-cost mortgage, investing in yourself through a student loan or borrowing to build a successful business. It’s debt that ultimately improves your financial position. Bad debt on the other hand is a drain with no financial benefit – expensive personal loans, overdrafts and credit cards for instance. These should be repaid as soon as possible. 

It is so easy to take on debt these days with ‘buy now pay later’ (BNPL) options online. If you do use these, keep careful track and ensure you minimise interest as much as possible. Typically, you get a set interest-free period with payment only taken from your account on an agreed date if you decide to keep the items. After that ‘buy now pay later’ becomes ‘buy now pay more,’ so think carefully before using these services. Find out more about BNPL on the Government’s MoneyHelper website. 

Meanwhile, mortgage debt should be kept under control, and an appropriate repayment plan should be in place if it is an interest only mortgage rather than a repayment mortgage where you pay back both interest and capital. 

2. Build up an emergency fund

Once your house is in order in terms of debt, you can put other parts of your financial plan into place. A lump sum could help you build a reserve of readily available cash to draw on in the event of an emergency – often called a ‘rainy-day fund’. 

Sometimes life throws you a curveball, and a sudden event such as a boiler breakdown or essential car repair can seriously dent your finances. Having a fund to draw on give you confidence you can deal with issues that arise. 

There is no prescriptive size for a rainy-day fund. Three to six months’ income is often referred to as a rule of thumb, but it depends on lots of variables such as job security, whether you have dependents and generally to what extent you think your life is ‘futureproofed’. Some people aspire to a sizeable amount to give them full confidence, even though sitting on lots of cash is generally inefficient as interest is generally not enough to keep up with the cost of living. 

However much you decide to keep at hand, your emergency savings should still be working hard. Your bank might not be offering the best interest rates and often it’s smaller and “digital” banks and building societies that offer better returns. An online savings platform might help you out. Depending on your near-term plans a mix of easy-access, fixed-term, and notice savings accounts can provide both flexibility and better returns. 

See what savings rates you could access with Charles Stanley Direct Cash Savings. 

3. Lump sum investing

Investing puts your money to work, potentially growing your lump sum over time. But investments may fall as well as rise. That’s why it’s wise to wait until you’ve paid off any expensive debts and saved up a rainy-day fund before you start investing. 

When your finances are in shape, a lump sum investment can be a viable way to build up a larger pot of money over time. Many people enjoy building up their knowledge, researching company shares and trading to make an income – but you don’t need to be an expert to invest, and when you are starting out it’s best to keep things simple. By investing in a fund, you are spreading your money and risk across dozens of different companies listed on the stock market, either managed by an expert or designed to track an index – for instance through exchange traded funds. 

Find out more: Why funds can be a great investment shortcut 

Another way to take the weight off your shoulders is a ready-made diversified portfolio in the form of multi-asset funds, which can give you peace of mind that your investments have been curated by a team of experts. You’ll still need to choose the right product based on the amount of risk you want to take, though. 

Be sure to use appropriate tax ‘wrappers’ for your investing goals such as a pension for retirement, ISAs for earlier access and Junior ISAs for children. By placing your money into ISAs, you can save money and make your investments work harder for you. You won’t pay capital gains tax on any profits and there’s no tax on dividends from shares or the income earned on bonds. 

4. Put a lump sum into your pension

Another way to help protect your lump sum from tax is by contributing to a personal pension. If you aren’t paying into a pension currently, it’s worth considering, especially if a comfortable retirement is one of your long-term life goals. 

When you make a contribution to your personal pension such as a SIPP, the government adds money. This is called ‘pension tax relief’ and it is the main advantage of pension saving. Not everyone is aware of this special helping hand, but it can have a considerable impact on the size of your investment pot and the income you can generate in retirement. 

When adding money to your pension you need to be happy that you won’t be able to access your money until you are at retirement age. Presently this is 55 for personal pensions but it is set to rise to 57 from 6 April 2028. 

If you are employed, you will also be entitled to pension contributions made by your employer, provided you keep opted into your work scheme and make the required level of contributions yourself. You should prioritise this form of investing as it is often the most efficient way to provide for retirement by some distance. 

Some of the key things to know:

• With pensions, the government will automatically top up your contribution with 20% basic rate tax relief
• Higher-rate and additional-rate taxpayers may claim up to a further 20% and 25% respectively back through their tax return*, meaning a £10,000 pension contribution can cost as little as £5,500
• The pension annual allowance (the total that you can put into pensions including tax relief and employer payments) is £60,000 in the 2025/26 tax year. However, this is dependent on earnings and whether you have taken any pension benefits already. 

*Please note tax relief for Scottish taxpayers differs from the rest of the UK)

Find out more: How to make large pension contributions | Charles… | Charles Stanley 

Is now a good time to invest a lump sum?

The recent escalation in geopolitical and trade tensions has led many of us to ask: ‘is it a good time to invest?’ The truth is no one can predict the direction of share prices or markets reliably in the short term. However, if you adopt a long-term mind set and allow your investments to ‘compound’ over many years then you stand a good chance of making money and beating inflation. In fact, investing when the headlines are negative can often mean buying in at depressed prices and reaping better returns in the long run compared with when things seem buoyant. 

If you are concerned about the risks of investing a large sum in one go, gradually feeding money into investments is an option. By investing regularly in chunks you end up buying more shares or units when prices become cheaper and fewer when they become more expensive. If you keep buying as the market falls you could, over time, smooth returns, and even turn market volatility to your advantage; though there are still risks and as with all investments, you could get back less than you put in. 

Read more: Should you invest in a lump sum or monthly instalments? 

Do you need a financial plan?

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We offer a free, no commitment, 15-minute call to discuss your needs. You can then delve deeper into a subject that’s relevant to you through a one-hour coaching session should you wish. Having a conversation with an expert can help you to take control of your finances, giving you freedom and peace of mind.

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The tax treatment of pensions is based on individual circumstances and may be subject to change in the future.