MARKET COMMENT
What To Do With £10,000

By David Kuo (TMFDragon)
November 2, 2004

What should you do if have a £10,000 windfall?

Ten thousand pounds is a significant amount of money, and could easily be frittered away if you are not careful. However, investing such a lump sum can be intimidating if you have little financial know-how.

Even for experienced investors, there are a number of considerations before a windfall is put to work. These will include your tolerance to risk, your tax position and whether you have debts.

Pay off your debts first

If you owe money, then paying off those loans should be top priority. There is little point in receiving interest if the cost of servicing any outstanding borrowings you have is higher.

For instance, homeowners who are paying a mortgage could consider putting the money towards their home loans. By knocking off £10,000 from your mortgage, a borrower paying a typical standard variable rate of 6.75% will save £675 a year in interest. (By way of comparison, a standard-rate tax payer will need to find a savings account paying interest at 8.4% - and no such account exists at the moment).

High-interest accounts

If your debts are under control, then putting the money into a high-interest savings account is worth considering.

Many of the more attractive savings accounts are for online savers, and some of those are paying in excess of 5%. Better still, wrap up some of the windfall in a Cash ISA. This is the same as putting the money into a savings account, though with a Cash ISA you won't have to pay any tax on your interest.

Unfortunately, the limit for contributions into a Cash ISA is £3,000 a year. Consequently, you may have to open another account in your partner's name. Even still, you will be limited to a combined contribution of £6,000 in any one tax year.

The stock market

If you are comfortable with risk, then the stock market can be a good place if you want your investment to grow. Of course, no one can predict how much the stock market will return in future. However, historical evidence suggests that shares should do better than cash over the long-term.

Perhaps the most effortless way to invest in shares is through an index tracker where charges, which are vitally important, are lower. It is also possible to wrap up your index tracker in a Share ISA, which would protect any gains you make from the taxman. (You can invest up to £7,000 in a Maxi ISA, but not if you have opened a mini-ISA in the same year.)

Alternatively, if you are some time away from retirement then it may be better to consider a stakeholder pension. Pensions are a great way to protect your long-term savings from the taxman, and every £78 paid into a pension also attracts a £22 top-up from the taxman for basic rate taxpayers. (You can contribute up to £3,600 to a stakeholder pension, though you might be able to put in more depending on how much you earn and your age.)

Perhaps the most important thing to remember when investing £10,000 is to take your time. You may therefore find a mix-and-match approach more suitable, with the windfall allocated to a combination of cash, pension and share investments.