How to Invest £100,000 in the UK

Discover how to invest £100k in the UK across multiple asset classes like stocks and real estate to maximise returns while keeping risk and taxes in check.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

For those fortunate enough to stumble across a six-figure windfall, the initial excitement can quickly give way to unease – how exactly do you invest £100k in the UK?

Unfortunately, there’s no simple answer to this question. Everyone is different. We all have various financial circumstances, personal preferences, and emotional temperaments. But the good news is, there are a lot of options. And investors can craft an investment strategy that works best for them.

With that in mind, let’s explore where investors can invest their £100k, how to actually do it, and what critical factors to consider before making an investment decision. 

Where to invest £100k

There are many different asset classes for investors to choose from. Each one works differently and therefore is only suitable under certain circumstances. Let’s explore the five main types available to UK investors.

1. Cash

People rarely think of keeping money in the bank as an investment. And yet that’s exactly what saving is.

Over the last decade, interest rates have been near zero. As such, savings accounts haven’t offered much in terms of returns. Even now, after several interest rate hikes by the Bank of England, they still only offer a measly 1% to 3% rate.

Given the lacklustre returns, why would someone with £100k consider this option? Bank accounts have one major advantage over other asset classes – they’re safe. 

Even if a bank becomes insolvent, the Financial Services Compensation Scheme (FSCS) insures deposits up to £85,000. Therefore, should the bank go bankrupt, most depositors won’t lose any money.

Obviously, £85k is less than £100k. But this insurance policy is offered at every registered UK bank. Therefore, those with more than £85,000 can put the excess in another savings account at a different bank to protect all their funds.

2. Stocks

Stocks and shares represent small pieces of equity in businesses. They’re also known as equities. And through the stock market, investors can buy and sell shares almost instantly anywhere in the world. 

brokerage account is needed to do this. And investors need to verify that it’s connected to the right exchanges, such as the London Stock Exchange (for UK shares) or the New York Stock Exchange (for US stocks).

Shareholders are owners of a business. Therefore, they have a claim on any generated earnings. The more shares they own, the larger the claim. This income comes through two primary channels, dividends and capital gains.

When a company generates excess capital from operations and can’t find any better use for it, it often returns this money to shareholders as a dividend. This is more common among mature enterprises.

For younger businesses, growth can be expensive. That’s why the management team often retain profits (if any) for internal reinvestment. Providing the group is successful in its endeavours, the firm’s value will rise. Subsequently, this boosts the share price and increases the value of an investor’s position.

The UK’s flagship index, the FTSE 100, comprises the largest 100 companies on the London Stock Exchange by market capitalisation. Since its inception in 1984, it’s generated an average annualised return of 7.1%. On the other hand, the FTSE 250, which contains the 101st to 250th largest companies, has achieved returns closer to 10%. 

At this rate, investors with £100k could double their money within just seven years. But for those brave enough to pick individual stocks, it’s possible to unlock even higher gains. For example, Warren Buffett has historically achieved an average annual return of 19.8% since 1965!

Of course, there is a caveat to consider. Investing in stocks is risky. The stock market can be a volatile place in the short term. Crashes and corrections can quickly send even the best UK shares down the drain. And this risk is only amplified for those picking individual stocks.

A poorly constructed and badly managed investment portfolio can quickly destroy wealth rather than create it. Fortunately, The Motley Fool has several premium services to help uncover exciting quality investment opportunities.

3. Bonds

Stocks may offer the potential for higher returns, but they are notoriously volatile. And investors who aren’t keen on exposing themselves to excessive risk, bonds provide a safer middle ground.

These financial instruments are a form of debt. Investors can buy debt from businesses and governments in the form of bonds and, in return, receive regular interest payments called coupon payments. This reliability and consistency are why bonds are popular within pension funds. And it’s why they’re classified as fixed-income investments.

What’s more, bonds are graded by financial institutions to provide investors with a scale of risk. AAA bonds are considered the best, while anything under a BBB- rating is deemed to be “junk”. The higher the credit rating, the safer the investment but, the lower the return and vice versa. 

In the event of bankruptcy, bondholders are in a better position than shareholders. Why? Because, in almost all cases, they have priority. As a failing business is liquidated, whatever money is recovered is used to pay off outstanding creditors, including bondholders. 

Senior debts have priority over junior debts. And if there isn’t enough money to pay all outstanding loans, bondholders may lose a considerable portion of their investment. On the other hand, shareholders only receive the capital (if any) left over once every other party has been satisfied. 

4. Real estate

A pot of £100k is more than enough money to afford a mortgage and buy some real estate. Many see property investing as one of the safest forms of investment in the UK. That’s not strictly true since, just like the stock market, property values can fluctuate or even crash.

Buy-to-let has long been a passive income strategy that has helped bolster the wealth of landlords. What’s more, investing in a real estate investment trust (REIT) is a viable alternative for those not keen on taking on a mortgage or dealing with problematic tenants.

REITs are financial securities that trade very similarly to stocks. Money raised from shareholders is pooled into a single fund that a management team uses to buy, lease, and manage properties for consumers or businesses.

Due to the unique structure of these firms, REITs are required by law to return 90% of net earnings to shareholders via dividends, replicating the income stream from a buy-to-let property.

5. Annuities

Much like bonds, annuities are another class of fixed-income investment. These products are typically sold by insurance companies. And they are a contract whereby the investor will receive a fixed income stream for a specified period or for the rest of their life.

These products are designed to solve the risk of outliving savings. As such, they are an extremely popular type of investment for pensioners that don’t need access to the bulk of their capital.

How to invest £100k

With the main options explored, let’s look at how to invest £100k in these various asset classes. For cash, the answer is simple. Just deposit the money into savings accounts and enjoy a small but reliable interest income.

For British investors, capitalising on the tax advantages of a Cash ISA can also bear fruit. While there is currently a £20,000 annual allowance for deposits, any interest received inside a Cash ISA is tax-free.

As for annuities, they can be purchased directly from insurance companies and other financial institutions. But when it comes to stocks, bonds, and real estate (using REITs), investing requires a brokerage account.

As previously mentioned, this special type of account grants access to the financial markets. Investors deposit money much like any other regular bank account. However, the deposited funds can be used to buy funds, stocks, bonds, and other tradable securities on the brokerage firm’s investment platform.

Every trading platform works differently. Some offer additional features suitable for advanced investment strategies, while others may be simplified. Investors must spend time researching which platform is most suitable for them, paying close attention to account and trading fees. To help out, we’ve compiled a list of our top picks of share dealing accounts.

For British investors, there are two additional types of trading accounts that are worth considering.

1. Stocks and Shares ISA

Stocks and Shares ISA is a special investment account offered by some brokerage houses. 

Much like a Cash ISA, there is a £20,000 annual allowance, which is shared across all ISA accounts. So if an individual has put £10,000 into a Cash ISA, then they can only deposit £10,000 into their Stocks and Shares ISA in the same tax year.

Obviously, this can be restrictive for someone trying to figure out how to invest £100k in the UK. But, what makes a Stocks and Shares ISA so powerful is immunity to taxes. Any capital gains or dividends received inside a Stocks and Share ISA are 100% tax-free. And in the long run, this can have an enormous positive impact on an investor’s wealth.

2. Self-Invested Personal Pension (SIPP)

Another special type of brokerage account is a Self-Invested Personal Pension or SIPP. Following recent changes in the government’s Spring Budget, investors can now deposit up to £60,000 per year into this type of account. 

Just like a Stocks and Shares ISA, any capital gains and dividends received are tax-free. But what makes a SIPP even more powerful is that all deposits provide tax relief. 

Individuals within the basic tax rate income bracket will receive a 20% top-up from the government directly into their SIPP account. Therefore, for every £1,000 deposited, an investor will actually end up with £1,200. And those in the higher and additional-rate tax brackets can receive an extra 20% and 25% relief, respectively.

However, there are several caveats. Firstly, any funds or profits made inside a SIPP cannot be accessed before age 55. And, as of 2028, this threshold will increase to 57. Furthermore, as soon as money is withdrawn from a SIPP, taxes re-enter the picture.

Much like a regular pension, 25% of the money inside a SIPP can be withdrawn tax-free. The rest is subject to standard income tax as and when an investor decides to withdraw additional funds.

In short, a Stocks and Shares ISA is tax-free, while a SIPP is tax-deferred.

How to choose the best investments

Every asset class and investment account has advantages and disadvantages. Investors must carefully consider which ones are most appropriate for their circumstances. That involves determining what their actual investment objective is.

Cash may provide lacklustre returns. But it could be far more suitable for an individual planning to buy a new car within the next two years. Similarly, someone building a pension pot for the next two decades will likely find asset classes such as stocks, bonds, and real estate more appropriate. And for an individual already enjoying retirement, exploring annuities could be the best move.

An investor’s objective helps define their time horizon, which, in turn, dictates which asset classes are likely most suitable. But investors also need to consider their personal risk tolerance. Those uncomfortable with volatility may find asset classes like stocks and real estate less alluring. Alternatively, bonds may be far less attractive to investors with a higher risk appetite. 

The importance of portfolio diversification

Regardless of which asset classes an investor decides to pursue, it’s essential to highlight the importance of portfolio diversification. By spreading £100k over multiple uncorrelated asset classes, investors can mitigate the impact of one asset class underperforming.

For example, having cash at hand during a stock market crash can not only provide a source of funds to cover living expenses but also provides capital to buy more shares while they’re cheap. When it comes to stocks, diversification can be taken a step further by investing in high-quality businesses from various industries and even geographies. 

A portfolio concentrated in technology stocks would have delivered stellar returns over the last decade. But as soon as 2022 reared its head, this sector suffered a major downturn, with some tech stocks falling as much as 90%!

Is investing £100k a good idea?

Before jumping headfirst into investments, it’s important to stress that investing money isn’t always the right decision. 

Individuals with high outstanding debts may be better off using £100k to wipe out these loans. This is especially true for those who have accumulated substantial credit card debt. 

In the UK, credit cards have an average interest rate of 30.4%.1 There are very few asset classes that can reliably generate this level of return. And the ones that can carry extremely high levels of risk. 

Similarly, a household struggling to keep up with their mortgage payments may be better off using their £100k to pay down their principal and reduce their monthly premiums.

For those unsure where they stand financially, speaking to an independent qualified financial advisor may be the wisest investment.

Final thoughts

Learning how to invest £100k in the UK can be an arduous journey, but it should not be rushed. After all, investing is a serious matter and needs to be treated as such. Poorly prepared investors making uninformed decisions is a surefire way to destroy wealth.

Investors need to spend time exploring all available options and potentially even speak to a professional for financial advice.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.