How should I invest £100,000
With that in mind, our "How should I invest..." column aims to help beginner investors of any age and any financial background plan for their family's future by offering hints and tips from the UK's leading investment professionals on how and where they should invest their cash.
In this edition, it's how to invest £100,000.
£100,000 is a vast amount of money for most people. It could wipe out debt and help pay off the mortgage. But if you already have a cash savings buffer and want to invest it, what are the options?
Well, that all depends on how long you can invest for, what access you need to your money and what level of risk you are prepared to take, says Patrick Connolly, a chartered financial planner at Chase de Vere.
If you want to invest for at least five years and to invest tax efficiently, a combination of pensions and stocks and shares Isas often works well, he says.
"Pensions provide initial tax relief at your marginal rate, so they can be more beneficial for higher-rate taxpayers but they are inflexible, so you can't get hold of your money if you want it," he says.
On the other hand, stocks and shares Isas can also be tax efficient and you can access your money whenever you want. The current stocks and shares Isa allowance is £15,000, although this includes any money you put in cash Isas.
Of course, £100,000 is more than you can invest in Isas and pensions tax efficiently in any one tax year. So you could use up your full annual Isa and pension allowances in each tax year, while investing the remaining money elsewhere or leaving it in cash.
So what else could you be investing in? With an investment of £100,000 (or less each year's Isa and pension allowances), you could build your own investment portfolio.
The best way to spread risk is to invest in different types of investments. "So perhaps put some money in shares, some in fixed interest and some in property," suggests Connolly.
"Then also spread risk within each of these assets by picking different types of investment in different geographical regions. So, for example, with shares you can invest in large and small companies, in different types of businesses and in different parts of the world."
Andy Parsons, head of investment research at The Share Centre, agrees with Connolly, but he advises medium-risk investors to consider a portfolio of income-generating funds – around 10 to be precise – to gain the same diversity.
"Unless the income is immediately needed, investors should look to have it reinvested to benefit from the power of compounding returns," he adds.
Connolly has two more tips for higher-risk investors."High earners who already have large diversified investment portfolios in place and are prepared to accept high levels of risk can consider venture capital trusts (VCTs) and enterprise investment schemes (EISs)."
He says both benefit from 30% initial income tax relief plus tax-free capital growth. However, while the tax attractions of VCTs and EISs are "undeniable", he says, they typically invest in small, unquoted companies. As such, they should only be used by those who understand the risks.
Andy Parsons suggests £100,000 lump sum investors with a medium appetite for risk consider a portfolio of income-generating funds, made up of: Artemis High Income; Jupiter Strategic Bond; Standard Life UK Equity Income Unconstrained; Unicorn UK Income; JO Hambro UK Equity Income; BlackRock Continental European Income; Legg Mason Clearbridge US Aggressive Growth; Legg Mason Japan Equity; GAM Star Technology; and Polar Capital Healthcare Opportunities.
He adds: "By the very nature of the underlying constituents within the various funds, the portfolio will be well diversified in terms of sector allocation. However, to benefit from two key industries that we believe will have a considerable impact on our lives, the portfolio has included two specialist funds that focus on technology and healthcare."
For higher-risk investors, Jason Hollands, managing director of business development & communications at Bestinvest, suggests a combination of exposure to small company funds such as Old Mutual UK Smaller Companies, Baring Select and Legg Mason US Smaller Companies, and multi-cap funds such as the BlackRock UK Special Situations and Standard Life UK Equity Unconstrained fund.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.