How to invest £500,000
£500,000 is a serious a windfall and there’s no end to the things you can do with the money. But while £500,000 can bring a lot of luxuries within reach, it can also buy you financial security for life, if you invest it well.
Working out the right way to invest £500,000 isn’t always straightforward though. What makes most sense for you will depend on what you want to achieve with your money and the stage of life you’re at.
For example if you’re younger, you might want to invest £500,000 for growth, but if you’re older you may want to use it to generate an income for retirement. Alternatively you might just want to preserve the value of your lump sum.
Find out how to invest £500,000 and the steps you can take to shelter it from tax with our guide.
Building a £500,000 investment portfolio
It’s important not to put all of your eggs into one basket; that means to invest £500,000 wisely, you need to think about asset allocation and spread your money across a range of asset types.
A diversified portfolio will normally include three key asset classes: cash, fixed interest and stocks and shares.
Savings accounts aren’t very exciting but they’re an important part of your investment strategy. Firstly, you need to make sure that you have enough money in an easy access account for emergencies (three to six months’ expenses is normally recommended), then you need to think about how much you’ll need for any large expenses you’ll have over the next few years. You’ll probably want to enjoy some of your windfall, so think about holidays, a new car, building work or money to move home.
Having this money in cash means you don’t have to risk cashing in other investments at the wrong time.
However, cash accounts aren’t a great home for the bulk of your windfall, even if your aim is just capital preservation. This is because the spending power of your money is likely to be reduced over time by inflation.
Your money is much more likely to keep up with inflation (and hopefully outstrip it) if it’s invested in asset classes with greater potential for returns.
Fixed interest is the term for loans to organisations that pay a fixed rate of return. Loans to businesses are corporate bonds, while loans to governments are known as government bonds or gilts. In terms of risk, these are generally considered to fall between cash and stocks and shares. However, some bonds will be riskier than others. As a rule, the higher the yield of the bond, the greater the risk.
You can buy individual corporate bonds and gilts, or you can invest in a fund that offers access to a portfolio of bonds.
Stocks and shares
Shares are a stake in a company listed on a stock exchange. That means the value of your investment isn’t guaranteed and will rise and fall in line with the performance of the company in question.
However, so long as you can invest for the longer term (five years at least) you should be able to ride out any volatility and start to reap the benefits of compound returns. This is where your returns start earning returns and over the years it can give your investment a significant boost.
Buying individual shares is higher risk and takes a lot of research. It’s easier and less risky to invest in a fund that invests in a broad portfolio of shares on your behalf.
Choosing the right investments
How you spread your £500,000 investment across the different asset classes, as well as your individual holdings, will depend on your attitude to risk.
The more that is invested in stocks and shares, the higher risk it will be. However, the longer your investment horizon the more risk you can normally afford to take. You can always reduce the risk profile of your investments over time to lock in gains and reduce the chance of losses.
It's also important to note that while there is a risk associated with stock market investing, that doesn’t mean its high risk. It all comes down to the investments you choose and the level of diversification you’ve got.
A fund that has a global spread of shares, for example, or invests in big blue-chip companies, will be lower risk than a fund that invests solely in smaller companies or emerging markets.
You should also think about your investment objectives. If your priority is capital preservation you’ll likely have a more cautious approach than an investor that’s seeking growth.
Alternatively, if you want an income from your portfolio, seek out income-generating funds.
Don’t forget tax when you invest £500,000
Tax can take a significant slice out of your returns, but if you are careful and take advantage of all the reliefs and allowances that you can, it’s possible to reduce the amount you’ll need to pay.
- Stocks and shares ISAs: Each year you can invest £20,000 in an ISA. This money will grow tax-free and there will be no tax to pay on withdrawals either. You can access the money at any time.
- Junior ISAs: Children also have an ISA allowance and you can invest up to £9,000 each year on their behalf. This will also be tax-free but they won’t be able to touch it until their 18th birthday.
- SIPPs: You can invest 100% of your income (up to £60,000) into a pension each year. Although you can’t access the money until you are 55 (rising to 57 in 2028) you get tax relief on contributions, equal to your rate of income tax. There are also no restrictions on how you take money out of your pension.
Most online platforms will offer access to all these account types as well as general trading accounts (which don’t have any preferential tax treatment). Each account will also offer access to the same range of investments.
Although tax allowances won’t allow you to shelter all of your £500,000 investment, with some savvy financial planning there are ways to reduce your tax bill.
- Use your capital gains tax allowance: Regularly using your CGT allowance will prevent gains building up and reduce the amount you need to pay. Married couples don’t need to pay CGT on transfers between each other, making it easy to use both allowances.
- Do a ‘Bed and ISA’: You can only pay £20,000 into an ISA each year, but Bed and ISA rules enable you to gradually move other investments over in time into this tax shelter. This involves selling investments in a trading account and immediately rebuying them in your ISA. You just be careful that you don’t trigger a capital gain.
- Do a ‘Bed and SIPP’: Similar Bed and SIPP rules also enable you to gradually move money in a trading account over into your SIPP. You just need to be mindful that you don’t exceed the annual allowance for pensions or trigger a CGT bill.
- Take advantage of carry-forward rules: Carry-forward rules enable you to use any of your unused pension annual pension allowance from the previous three years. However, it’s important to be aware you cannot pay in more than 100% of your earnings for that tax year.
- Work as a team: Couples can shelter £40,000 between them by using each of their ISA allowances. Married couples can also use both pension allowances to capitalise on tax relief on pension contributions.
- Consider VCTs: Once you’ve maxed out on your pensions and ISAs you might want to consider a venture capital trust. To encourage investment in start-up businesses, VCTs offer 30% tax relief on investments worth up to £200,000 along with tax-free dividends, so long as you hold on to it for five years. However, while the tax-breaks are generous, start-up businesses are more likely to fail than more established firms, making VCTs a high- risk investment.
Should I get advice to invest £500,000?
There’s a lot to consider when you’re investing £500,000. To make the most of your windfall and avoid paying more tax than necessary, you’ll need to invest your money across multiple investments and manage them carefully.
If you have a family that you want to inherit your wealth after you’ve died, you’ll also need to think about inheritance tax and estate planning too.
So, while there is no requirement to take advice, it could be a sensible investment in itself.
A good, independent financial adviser (IFA) will review all your finances and help you put in place a plan to make the most of your £500,000 investment and achieve your financial goals.
In addition to making sure you are taking advantage of all the relevant tax breaks that you can, an IFA can also help you protect your wealth and safeguard it for future generations too.