If you come into a large amount of money, how you save it will be up to you. You may want to plan for retirement, pay off a chunk of your mortgage, or open a savings account for a rainy day.
What is a lump sum?
A lump sum can mean different things to different people. While winning the lottery may be unlikely, there are often times in life where you can find yourself with an amount of money that’s more than you’d normally have. For example, you might have:
Sold some property
Got a bonus from work
Received a redundancy payment
Taken a tax-free lump sum from your pension.
There is lots to think about when you’re deciding what to do with a lump sum, including the savings account you pick.
What can you do with a lump sum?
The choice of what to do with a sudden windfall are up to you. Depending on your circumstances, you may decide to save, pay off debts or plan for the future.
Create an emergency fund
Setting some money aside as an emergency fund may help you avoid money problems in the future.
If you have money in an account that you can access when you need it, you may be able to cope with a sudden bill or job loss.
Save towards a long-term goal
Buying a home, planning a wedding or splashing out for a big purchase, like a new car might be one of your longer term goals. You may want to put your lump sum into a savings account for this. You’ll need to know the rules of the account you are paying into and when you can take money out.
Some accounts are fixed for a set period, called a term. You may not be able to withdraw money without losing interest.
Pay off debt
If you have existing debt, you may choose to pay this off before you start saving.
Overpay on your mortgage
If you have one, you may be able to reduce the amount of interest you pay overall by paying off a chunk of what you owe. Most mortgages allow you to pay off 10% per year of how much you still owe.
Be careful not to overpay by too much, as you may be liable for an early repayment charge. Check the terms of your mortgage to see how much you can pay off.
Savings accounts for lump sums
Putting your lump sum into a savings account means you can be paid interest and this may help make your money go further.
The exact type that is best for you will depend on how much you have to save and if you need access to the money.
A Cash ISA is a tax-efficient way of saving. Currently (2023-24 tax year), you can pay in up to £20,000 per tax year. The tax year begins April 6. You have two options with a Cash ISA:
Fixed Rate Cash ISA - The interest in this type of Cash ISA is fixed for a set period. You may not be able to make withdrawals during this period.
Variable Rate Cash ISA -The interest rate for this kind of Cash ISA can go up or down.