How to invest £20,000: What is the best way to invest your money?
£20,000 is a great amount to invest and – if you make the right choices – it can make a difference to your future financial security. This guide walks you through the practical ways to invest £20,000, including how to balance risk and reward by spreading your money across different types of investments.
Please remember, investment value can go up or down and you could get back less than you invest. This material is intended for educational purposes only and is not investment research or a personal recommendation to buy/sell any financial instrument or adopt any investment strategy. If you are unsure about the suitability of an investment product or service, you should seek advice from an authorised financial advisor. Tax treatment depends on your individual circumstances and may be subject to change in the future.
What you'll learn in this guide...
- Whether investing is the right choice for you
- What to consider before you invest – from setting goals to understanding your timeframe and risk appetite
- The types of investment accounts and assets you can choose from
- How diversification can help reduce your risk
Jump to...
- Should you save or invest £20,000?
- Key things to think about before you invest
- The best ways to invest £20,000
- Choosing your investments and creating a balanced portfolio
- 6 tips for investing £20,000
- What are the risks of investing £20,000?
- Where to start when you’re investing £20,000
- Investing £20,000 FAQs
Whether your £20,000 comes from an inheritance, a bonus, or money you’ve saved, it’s a significant sum that could help bring you closer to achieving your goals.
With so many options, it’s completely normal to feel uncertain about where to begin. But with proper planning, you can find the best way to grow your wealth and choose an approach that’s right for you.
Should you save or invest £20,000?
Whether you choose to save or invest your £20,000 depends on several factors – including your goals, timeframe and willingness to take risks.
Some common financial goals might include:
- Becoming financially independent
- Providing for loved ones
- Saving for retirement
- Buying a home
- Paying off debt
- Building an emergency fund
Saving
Choosing to save £20,000 is a low-risk option. If tucked away in a cash savings account, it earns interest – either at a fixed or a variable rate that typically changes when interest rates rise or fall. Depending on the account type, your cash can be easy to access.
Having cash savings is prudent for an emergency fund, which sets aside three to six months' worth of essential expenses for a rainy day. Ideally, cash in an emergency fund should be readily accessible when needed.
While cash savings are a low-risk way to earn interest, they’re not entirely risk-free. Inflation can erode the real value of your money over time due to the interest earned often failing to keep up with price rises. As a result, you may not get the growth you need to achieve your financial goals.
While there are no guarantees, history shows that the best way to stop your money eroding is to invest it. Over the last two decades, UK stocks have returned on average 3.1% per year (after inflation), according to Barclays’ Equity Gilt Study 2024. Cash, on the other hand, saw a 1.8% decline in value, while US shares fared better, delivering 6.4% returns over the same period.
Investing
Compared to saving, investing your £20,000 offers a greater opportunity to grow your money. You have a better chance of achieving higher returns over the long term, especially by investing in the stock market. In addition, investing offers the best opportunity to outpace inflation and grow your money in real terms.
What’s more, depending on how you invest, it can also be tax-efficient, especially if you use tax wrappers like a Stocks & Shares ISA or Self-Invested Personal Pension (SIPP).
However, the risk with any investment is that performance isn’t guaranteed, and you may lose money, especially over the short term. If you have a reasonable amount of time to invest (five years at least) and diversify across different asset classes, countries or sectors, you should be able to ride out short-term volatility and provide the opportunity for your money to achieve greater growth.
Key things to think about before you invest
Investing isn’t a ‘one-size-fits-all’ approach – it’s shaped by your individual circumstances and what works best for you. A great place to start is by figuring out what matters to you:
What are your goals?
Think about what you want to do with your money in the future and what you would like it to achieve. You might be investing to save for retirement, achieve financial independence, or provide for your loved ones – it’s completely up to you.
When might you need access to the money?
Your investment goal will help determine how long you plan to invest. If you have a shorter investment timeframe and need to access your money sooner, it’s best to avoid speculative or higher-risk investments and opt for safer, low-risk options. While speculative investments, by nature, tend to have a short-term focus and aim to generate substantial gains from market volatility, they also carry a high level of risk.
If you're investing with a longer time horizon in mind, there may be more of a chance for you to ride out potential market fluctuations and benefit from compound growth. Personal goals, like saving for a house or retirement, tend to be determined by your target date and life stage, and often involve longer investment timeframes.
If you have any major expenses coming up (such as a house deposit or starting a family), consider keeping some of your money in cash.
What is your attitude to risk?
By deciding to invest, you accept a certain amount of risk. How much risk you’re willing to take depends on your financial situation, goals, and personality. It’s worth asking yourself how much money you can afford to lose, and if an investment goes the wrong way, would it impact your standard of living? It’s important you feel comfortable with the possibility of losing money, as the value of your investments can rise or fall.
How much investment risk you're willing to stomach – known as risk appetite – is a personal decision, as only you can decide what level of risk you can tolerate emotionally, relative to your financial circumstances and time horizon. That said, there are things that you can do to manage risk, such as investing for the long term (ideally five years or more) and building a diversified portfolio.
What is your current debt position?
If you’ve got any high-interest debt like credit cards or personal loans, it usually makes sense to pay those down before you invest. This is because interest on debt is usually much higher than potential investment returns.
For mortgages, you may also want to consider the benefits of making a lump sum overpayment on your mortgage. If you’re unsure how to proceed, you can always invest part of your £20,000 and keep the remainder in cash savings.
Do you have an emergency fund?
It’s a good idea to keep three to six months' expenses in an instant-access savings account. An emergency or rainy-day fund means you don’t have to risk selling investments at the wrong time if you’re faced with any unexpected expenses.
The best ways to invest £20,000
There are many ways to invest £20,000. Below are some of the options to consider.
Stocks & Shares ISA
With an ISA, any gains you make are sheltered from tax, and you won’t pay any tax when you withdraw the money either. The annual allowance for an ISA is £20,000, so you can invest up to this much each tax year. The tax year runs from 6 April to 5 April the following year.
You can choose where to invest your money, with access to a range of asset classes such as shares, funds, investment trusts, ETFs, bonds, and more.
Even though it’s best to invest for the long term, you can access your money whenever you need it. However, you could negatively impact its growth if you withdraw it frequently or use it before it’s had time to grow.
Self-Invested Personal Pension (SIPP)
Like with an ISA, your £20,000 is also sheltered from tax in a Personal Pension. You get the benefit of tax relief on your contributions, equivalent to the highest rate of income tax you pay:
- Basic-rate taxpayers: 20% tax relief
- Higher-rate taxpayers: 40% tax relief
- Additional-rate taxpayers: 45% tax relief
For example, if you’re a basic rate taxpayer and you pay your entire £20,000 into your pension, the total contribution – including tax relief – is £25,000. Your 20% tax relief translates into a 25% top-up.
You can withdraw up to 25% of your pension as a tax-free lump sum, subject to a maximum of £268,275. However, the rest of your pension withdrawals will be taxed as income at your marginal rate.
You can’t, however, access your money until you're 55 (rising to 57 in 2028), or you will face charges. And if you're investing a large amount into your pension, keep in mind the annual allowance, which limits your contributions to 100% of your income, up to a maximum of £60,000 a year.
General investment account (GIA)
A general investment account (GIA), also known as a Trading Account, is a standard investment account that lets you invest as much as you like across a wide range of assets.
Unlike an ISA or a Personal Pension (SIPP), a Trading Account allows flexible and uncapped investing as it doesn’t have an annual contribution limit.
However, if you can, it’s usually a good idea to use up your ISA allowance first, as a Trading Account doesn’t offer any tax protection. This means your investment returns may be subject to Capital Gains Tax (CGT) or dividend tax, if any gains or dividends exceed the annual allowances.
The value of your investments may go down as well as up. You may not get back all the money that you invest. If you are unsure about the suitability of an investment product or service, you should seek advice from an authorised financial advisor.
Choosing your investments and creating a balanced portfolio
The key to successful investing is creating a balanced portfolio. You can achieve this by spreading your money across a range of different asset classes, sectors, and countries, which is known as diversification. If one holding performs poorly, it won’t drag the rest of your portfolio down.
You get access to the same wide choice of investments whether you choose a Stocks & Shares ISA, Personal Pension, or Trading Account.
Shares – Direct holdings in companies listed on UK and overseas stock markets.
Investment funds – A collective investment that is managed on your behalf by a fund manager.
Investment trusts – Another form of collective investment, but unlike funds, they’re set up as listed companies with an independent board of directors and a fixed number of shares available to purchase.
ETFs – Another form of collective investment that seeks to replicate the performance of an index, commodity, or basket of assets. Many ETFs track long-established equity indices like the FTSE 100 or S&P 500 and can be traded daily on the stock market, like individual stocks.
Bonds – A company or government borrows money by issuing a bond, paying interest on the money the investor loans them, and repaying the loan amount at maturity, so long as the issuer is not in serious financial difficulty.
If you choose to open a Stocks and Shares ISA, SIPP or Trading Account, you’ll take a hands-on approach, making your own investment decisions and keeping on top of your portfolio with regular reviews.
Or if you prefer, you can also choose to be a hands-off investor, by leaving the decisions to professionals that manage your account for you, such as the ii Managed ISA.
6 tips for investing £20,000
1. Ensure your portfolio is diversified
A well-diversified portfolio might include stock market-linked assets like shares, ETFs, funds, and investment trusts. You could also explore international investments.
To achieve further diversification, you could balance your portfolio with a mix of fixed-interest assets like corporate bonds and gilts, or even consider property.
2. Be mindful of fund charges
As an investor, the only thing that you can control is costs, so be mindful of fees as they can eat into your returns over time. One way to help reduce costs is to consider investing in passive funds (index funds or ETFs) that replicate the performance of your chosen index.
Passive funds are much cheaper than actively managed funds, with some costing 0.1% or less a year (£20 on a £20,000 investment) to provide investors with the returns of the FTSE 100 or America’s S&P 500 index.
Actively-managed funds – those managed by a professional investor – attempt to outperform a particular index. However, there are no guarantees this will be achieved, and if the fund underperforms, investors still pay the fund fee. The typical fund charge is around 0.85% (£170 on a £20,000 investment).
3. Make sure your investments are tax-efficient
If your money is not held in a tax-free wrapper like an ISA or pension, you may have to pay tax on your gains. With an ISA or a Personal Pension (SIPP), your returns are sheltered from UK Income Tax and Capital Gains Tax. With a SIPP, you also receive tax relief from the government.
4. Don’t let emotion get in the way
It’s important not to let your heart rule your head. Successful investing takes time, and when markets are volatile, it usually makes sense to hold your nerve, not panic and sell. Tips to help you cope with market volatility include:
- Developing a long-term plan and focusing on this perspective, if you see short-term market dips
- Building a diverse portfolio so that at least one asset will perform well even if all the others don’t
- Both fear and overconfidence can result in poor decision-making, so try to keep a calm mind
- Consider leaving decision-making to professionals, such as with a Managed ISA, or if you are unsure, you may be better off speaking to a financial adviser
5. Think about risk
Your investments shouldn’t keep you awake at night, but not taking enough risk could mean you don’t get the returns you need. This means it’s important to be level-headed and take calculated risks.
As a general rule, the longer you have until you need your money, the more risk you can afford to take. You can always reduce risk further down the line as you near retirement or your objectives change.
6. How to manage risk
Length of time in the market, diversification and asset allocation all help to reduce risk.
While investments should be held for at least five years to smooth out any bumps in the market, that doesn’t mean that investments should be left unchecked. Review your investments regularly, perhaps every six months, to ensure that they’re performing in line with expectations. If they aren’t, try and understand why and then look to make changes if appropriate.
What are the risks of investing £20,000?
There are risks that come with investing – from the market itself to how frequently you invest or even the amount you invest.
If you invest your £20,000 as a lump sum when markets are moving upwards, you could see positive returns relatively quickly. Unfortunately, if markets are falling, you could also end up with a quick loss. Although you should be able to recoup your losses over time, it’s better to start on the right foot.
If you’re concerned about investing a lump sum, you can mitigate the risk by investing £20,000 gradually. For instance, you could break it up into several smaller lump sums or use the money to fund a regular investment plan.
Regular investing lets you drip-feed money into the stock market each month and take advantage of pound-cost averaging. This is when you buy your shares gradually and at different prices, so you get an average price over time. This tends to give smoother returns and allows you to benefit from buying more shares when prices are lower.
However, it doesn’t necessarily mean you’ll get better returns compared to lump sum investing, where your money will be in the market longer. Still, it can be less stressful and reduce any desire to try to time the market.
High-risk investments vs low-risk investments
When considering the risks of investing your money, it’s also worth thinking about how suitable high-risk investments are vs low-risk investments – as well as how that balance might affect your returns.
A high-risk investment is usually attractive to investors because it offers the potential for high returns. A low-risk investment, on the other hand, is often a safer bet for investors as it offers a greater sense of security, but with that comes a lower potential return. Low-risk investments include cash-like investments such as money market funds, gilts, and some bonds.
Why choose high-risk options:
- High risk, high reward – You're likely to see higher rewards over the short term by investing in successful, higher-risk investments. However, it’s important to remember that you could just as easily lose it
- Risky investments don’t necessarily equal bad investments – If you only invest a portion of your money in riskier assets, for example, with core-satellite investing, this can strike a good balance and potentially allow for further growth
- Risk is subjective – What is risky for one person may not be as much of a leap of faith for others. It’s important to ask yourself if you can afford to lose the money and if it will affect you if the investment doesn’t go in your favour
What to keep in mind:
- High risk, high loss – You need to be prepared to potentially lose all of what you invested by putting your money in only riskier investments
- Some high-risk investments are unregulated – Investments may lack regulatory protection, for example, crypto assets, so it’s important to check if the company offering the investment is regulated by the Financial Conduct Authority (FCA). If it’s not regulated, it also won’t be covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS). Your investments with interactive investor are authorised and regulated by the FCA and protected by the FSCS
- Lower levels of liquidity – Once your money is in the investment, it’s often difficult to access if you change your mind
Why choose low-risk options:
- Great way to get started – If you’re considering investing for the first time, it’s a great way to get started and build up your confidence
- Higher levels of liquidity – Your investment is less likely to be affected by short-term price changes, and you can withdraw your money more easily if you change your mind
- Can still generate good returns – A steady, low-risk investment portfolio could bring you more returns than a high-risk portfolio over the same period due to low volatility and incremental gains
What to keep in mind:
- All investments carry risk – Always understand the risk to ensure every investment is right for you, as there is no such thing as a risk-free investment
- Generate lower returns – You’re unlikely to get as good returns compared to higher-risk investments
- Rarely yield gains quickly – You need to be in it for the long haul, as your investments will typically grow slowly
Where to start when you’re investing £20,000
Before investing, make sure you consider:
- Your individual circumstances
- How long you want to part with your £20,000 for
- Your risk appetite
Also, it’s worth checking if your £20,000 is taxable first, as this may affect what you decide to do with it. With so many investment options available, it’s often hard to know where to start.
If you need inspiration, ii has a range of expert ideas to help you kickstart your journey. This includes taking inspiration from our Super 60 list of expert-rated funds, our Ace 40 best-in-class sustainable investments, or getting a helping hand with our Quick-start Funds.
Investment ideas
Need help choosing the right funds? Check out our Quick Start Funds, Super 60 and ACE 40 lists.
Investing £20,000 FAQs
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