What is the best way to invest £150,000 if I don't need it for a few years?

7 April 2015

Q

I am 24 and in six months my father will give me around £150,000 after he has sold our family home. The aim is to give me enough money so that I can buy a property. However, I don't plan on buying it for at least a couple of years as I would like to go travelling and work abroad. My dad advises me to invest the majority of the money into one or more investment funds through a company, such as Hargreaves Landsdown, until I am in a position to buy. However, I have been advised that I should only invest into a fund for a minimum of five years, which is too long for me. What would be the best thing to do with the money for the next couple of years while I am away?
From
SM/Berkshire

A

By putting the money in investment funds, it is possible that you'll generate a much better return than by putting it in cash. As you know, most cash accounts are currently paying very low rates of interest and there is little sign these will increase in the short term.

However, if you put the money in investment funds you will be taking a risk. How would you feel if the value of your money fell by 20%, say from £150,000 to £120,000?

This is possible because shares have been on a good run already and many fixed-interest investments are looking over-priced. If this happens, you would have very little time to make back these losses before you need to use the money. If you are likely to need the money within the next five years or so, then you should avoid taking investment risk. This means keeping the money in cash.

You should look to use your annual cash Isa allowances each year, which means that any interest on these savings will be tax-free. You should then focus on finding accounts paying competitive rates of interest.

Be aware of the Financial Services Compensation Scheme (FSCS) limit of £85,000 if your bank or building society went bust, so ensure you don't have more than £85,000 with one company.

While savings rates are now pretty poor, at least you'll know your money will still be there when you need it.