I have £x, what should I do with this lump sum?

Sometimes in life we may come across an unexpected sum of money for which we have no plans, but still recognise that we should invest some of it into our future to help us remain comfortable and financially stable. This could be from an inheritance, a business sale or even just extra money from salary that we don’t want to waste on impulse purchases.

The question, then, is how does one allocate such a windfall to help us achieve our long term goals, whatever they may be. Understanding our goals is one of the most important aspects of financial planning and becomes essential for larger sums but the first few steps are the same no matter one’s background.

One of the most frequent questions in /r/ukpersonalfinance goes something like: “I have £x, what should I do with it?” This incorporates general guidance and conventional wisdom, but of course might not fit everybody’s personal circumstances.


The UK Personal Finance Flowchart

This is a fantastic place to start, and summarises a lot of what is discussed below:

A flow chart to use as a starting point for allocating money

Step 0: Budget and reduce expenses, set realistic goals

Fundamental to a sound financial footing is knowing where your money is going. Budgeting helps you see your sources of income less your expenses. There are many ways to budget successfully, and there is a whole FAQ page dedicated to it on the Wiki. Start there first.

It makes financial sense to minimise your outgoings – housing costs, utilities, and basic sustenance are harder to eliminate than “entertainment,” eating out, or clothing expenses.

Once your budget is figured out, you need to figure out what your goals are. Secure retirement? Buying a house? Saving for a car? We’ll get to specifics on how to save for these below.

Also consider the mnemonic PIPSI when considering what priority budgetary needs should have. This stands for:

  • Protection: Life insurance is important if you have a young family or are the main breadwinner. It may seem like money for nothing but it can be invaluable.
  • Income Protection: Some employers have income protection as a staff benefit. If not there are private policies available. Same reason as above.
  • Savings: This relates to regular savings such as pensions and regular ISA contributions
  • Investments: Lump-sum investments come last on the list of priorities.

You may disagree with this, but it is a good starting point.

Step 1a: Repay expensive short-term debts

Tradition would dictate that an emergency fund should be your first priority, but if you have expensive short term debt like credit cards you should generally focus all of your “savings” on getting these paid off as priority #1.

Martin Lewis goes into some detail on the logic behind this here

His logic in summary:

Emotionally, many will find what I’m about to say difficult to deal with. The idea of having some cash in a savings pot feels safe, especially as traditional budgeting logic berates us to always have an ‘emergency cash fund’.

I disagree. It’s a must-do aim for the debt-free, but for anyone with expensive debts – particularly on credit cards – it’s silly.

The right thing to do is still pay off your debts with savings, including your emergency fund. Yet don’t cut up your credit cards, it’s important to keep the credit available in case of a substantial emergency (and substantial means just that, your roof falls in or you can’t feed the kids; not a new plasma TV).

The most sensible way to repay debts is the snowball method, in which debts with the highest interest rate are repaid first. Dave Ramsay popularised an alternative, where smaller debts are paid first to give a psychological boost, but this will end up with more interest paid in the long-run. NB: the names are different in the USA.

In both cases you should make the minimum payments on all of your debts before choosing which method to devote extra money to. As an example, Debtor Dan has the following situation:

  • Credit card A A: £1,100 with a minimum payment of £100/month, 5% interest
  • Credit card B: £1,900 with a minimum payment of £300/month, 10% interest
  • Sudden windfall: £2000

Dan needs to first pay £100 + £300 = £400 to make the minimum payments on credit cards A and B so the payments are recorded as “on time.” The extra £1600 can either go towards Loan A (smallest balance, Dave Ramsay’s method), eliminating it with £500 left to go towards credit card B, or credit card B entirely (highest interest rate, traditional snowball method).

What’s the best method? As mentioned, the traditional method will result in less interest paid overall, but do not underestimate the psychological side of debt payments. If you think that the psychological boost from paying off a smaller debt sooner will help you stay the course, do it! You can always switch things up later. The important thing is to start paying your debts as soon as you can, and to keep paying them until they’re gone. The snowball method calculator can help you plan your repayment method.

Should I be in a hurry to pay off lower interest loans? What rate is “low” enough to where I should just pay the minimum?

Depending on your attitude towards debt, you may want to stop paying off loans with low interest rates once you have paid all other loans above that threshold. A common argument is that the long-term return from investments in the stock market will likely exceed the interest rate from a low-interest loan. While this has been true in the past, keep in mind that paying down a loan is a guaranteed return at the loan’s interest rate. Stock performance is anything but guaranteed. Fairly common consensus is that loans above 4% interest should be paid off early in the debt reduction phase, while anything under that can be stretched out.

A caveat here is that repaying loans and credit cards is essentially a tax-free return. The repayment of a 4% APR loan by a basic-rate taxpayer is the equivalent to receiving (4%/0.8) = 5% on a taxable savings account. The effect is increased for higher-rate taxpayers.

Shouldn’t I stretch out a loan to improve my credit score?

No. Loans should never be stretched out longer than they need to be, as you should not pay a penny in interest more than you have to for the sake of improving one’s credit score. Interest rate should be the sole factor in whether you pay extra on a loan or not.

Step 1b: Build an emergency fund

An emergency fund should be a relatively liquid sum of money that you don’t touch unless something unexpected comes up. The idea is not to dip in every time you forgot to budget for a night out, but for genuine emergencies. Redundancy, emergency home maintenance, and so on. If you need to draw from your emergency fund at any time, your first priority as soon as you get back on your feet should be to replenish it. Treat your emergency fund right and it will return the favour.

How should I size my emergency fund?

For most people, 3 to 6 months of expenses is good. A larger emergency fund (e.g., 9 to 12 months) may be warranted if your job is uncertain or you are self-employed. It is worth spending some time thinking about this, and ultimately it is a personal choice. Some opinions from regulars in this thread.

What kind of account should I hold my emergency fund in?

Generally emergency funds should be held in safe investments you can access quickly. Traditionally this might include high-interest easy access savings accounts, easy access Cash ISAs, or NS&I savings products (which are 100% guaranteed by the government). Other less obvious options are floating-rate note funds and similar, which are available on investment platforms. BE WARNED, however, that these are not completely risk-free. Many “cash” investment funds lost value in the credit crunch, for various reasons.

Latterly, current accounts have been offering far higher interest rates than savings accounts. This is generally used a loss-leader to get customers in front of the bank’s salesforce, but can be taken advantage of. Examples change all the time but can be found with some searching online. Aim for 3% or higher in-credit interest (late 2014).

Examples of bad choices for emergency funds: equity-based investments, P2P lending schemes, fixed-rate savings accounts with withdrawal penalties or no withdrawals allowed.

Step 1c: Invest in some reading material

It cannot be stressed enough how much benefit you could reap from buying a few of the recommended resources. These are not affiliate links, nobody stands to gain anything other than you and the author. Pound for pound this is probably the best investment you could make, at outset. The page also includes online resources, podcasts and video series, if that is more your style.

Step 2: Employer-sponsored pension scheme

Once your emergency fund is set, the next step is to ensure you are a member of your employer’s pension scheme, assuming that they provide a contribution (often matched).

For example, if your employer matches up to a 6% contribution and you earn £20,000 PA, thanks to a combination of the matching and tax relief, the £2,400 (12%) contribution each year will only cost you £960 (4.8%) from your take home pay. This is an overnight return of +150%. The big caveat is that you won’t be able to access this until you are at least 55, which is why any emergency funds should be focused on first.

You may be able to use some of this lump-sum to obtain a matched contribution if you haven’t been fully taking advantage before. Check with your employer before making any decisions.

What if my employer doesn’t match, or doesn’t run a pension scheme?

Move to step 3.

What if my employer contributes to an account on my behalf regardless of whether I contribute or not?

You are very fortunate. Move to step 3.

A note about auto-enrolment: By 2017 all employers will have to offer their employees a pensions scheme where the employer contributes. By 2018 when the law fully applies the contributions will be a minimum of 3% employer, 5% employee. This is resulting in many traditional matched schemes closing. The narrowest earnings definition is also different to basic salary, but in general you still get a great return if you are a member paying 5% (gross of tax relief) and your employer is paying 3%.

Step 3: Shorter-term “important” needs – Housing, education, and so on.

We are lucky in the UK that most higher education costs are provided by way of subsidised loans. It may seem like common sense to want to repay these loans as quickly as possible (see Step 0a), but in reality the cost is usually much lower. Money Saving Expert has an in-depth guide about this which is essential reading for anybody looking at the costs of undergraduate study.

Buying a house is often top of the list of priorities people have. Generally speaking, if you plan to buy a house in the next five years, any funds you intend to put towards this should probably sit in a savings account. Whilst the stock market may look attractive, this is too short-term a goal for the risks to generally be worthwhile.

One important point to note is that the deposit is not the only cost of buying a house. Budget for conveyancing fees, mortgage fees and other less obvious costs like valuations, damp inspections and so on.

Step 4: Additional savings for the long-term in a Stocks & Shares ISA or a pension.

Next you should look at other long-term savings plans. In the UK you can basically choose between a (Stocks & Shares) ISA or a pension (SIPP, personal pension and stakeholder are all fundamentally similar).

ISAs and pensions have their own advantages/drawbacks. More detailed analysis can be found on this Monevator article, but in summary:

Please Note: The limit is £20,000 (18/19) per year in either Cash, Stocks & Shares, or a combination of both. You can only subscribe to one cash ISA and one Stocks & Shares ISA per tax year, but you can transfer previous years’ ISAs to anywhere. In ISA terminology new money paid in is a “subscription”.

Example: Mr I N Vestor pays £100 into a Cash ISA and £100 into a Stocks & Shares ISA on 6th April (start of the new tax year). He cannot open any other ISAs this year, and has made a total subscription of £200. He could pay the remaining £19,800 into either plan or a combination of both. He could transfer last year’s ISA into either one of his current plans, or any other different plan, without penalty, as long as no further subscription is made to the other plan.

Cash ISAs can be useful, but in the current low-interest environment the overall tax benefits of Stocks & Shares ISAs are better for most people most of the time. Especially considering that some current accounts pay double the best current Cash ISA rates

TreatmentStocks & Shares ISAPension
Annual limit£20,000Lower of £40,000 or annual salary, unless net adjusted earnings exceed £150,000, when it tapers down to £10,000 *
Lifetime limitNone£1.03 million (planned to rise with inflation) *
Tax relief on contributionsnonehighest marginal rate (20%, 40%, 45%) up to annual limit *
Tax treatment of funds withinTax-free growth (no CGT) and tax-free income (through dividends)Same as ISA
Tax treatment on funds taken outtax-free25% tax free, remainder subject to income tax as earned income
When the funds can be taken outAny timeAfter age 55 (due to rise to be 10 years before state pension age)
Death treatmentCan’t be inherited in-situ, forms part of deceased estatePayable 100% tax free outside of estate if death before 75, liable to income tax on recipient if death after 75 *
*The treatment is actually far more complicated, but for most people this is correct.

As you can see, there are pros and cons to both. From a purely financial point of view, for most people pensions will be better, but ISAs have some key advantages:

  • No lifetime limit
  • Funds can be accessed at any time
  • Less risk of regular goalpost moving (pension reforms are often a key promise made by political parties to win elections).

It is generally agreed that whilst pensions should be prioritised, it doesn’t hurt to have some savings in ISAs too.

Side-note: How to achieve Step 4

Referring back to step 1c, there are a number of ways to invest for the long-term, and the best plan would be to either:

  1. Educate yourself and decide to DIY the investments. The recommended reading section and online blogs will be useful here.
  2. Do step 1 and decide you would rather delegate the doing to a professional. Seek an independent financial adviser in this scenario. [Details in the sidebar/to be added to the Wiki later]
  3. Decide to go straight to seeking the advice of a professional. We would always recommend that people learn at least a little themselves.

Step 5: Frivolity!

Leave a little aside from all of the above serious life-planning exercise and consider treating yourself. Life is too short to funnel all of your money away immediately.

Generally speaking consider allowing 1%-5% of the lump sum to go out for a nice meal, a holiday, a bungee-jumping experience, or whatever else takes your fancy. You won’t find this suggestion in a financial textbook, and you may want to ignore it completely.


That’s the basic list you should be going through in order to determine where you put your sum of money. You may have compelling reasons for rearranging these steps as you see fit, but try to understand and appreciate the implications of doing so.


A note of thanks to the mods or /r/personalfinance for their fantastic Wiki which we have plagiarised and anglicised (with their permission!)

Looking for more general guidance? Check out our “9 UK Personal Finance Rules to Live By”