A lump sum investment is a significant sum of money that you plan to deposit into savings in one go. This is in contrast to depositing a little bit of your income into a savings account each month to gradually build up a savings pot.
You may come into a lump sum by inheriting money, receiving a bonus or redundancy payout or, if you’re lucky, by winning the Lottery, for example. Alternatively, you may have a lump sum that you’ve accumulated after building up your savings over a number of years.
If you have a lump sum, you may consider different types of savings accounts than someone who was looking to make regular deposits into an account.
This depends on the type of savings account you deposit your lump sum of money into. If you put it in an easy access account or a notice account, you will normally be able to make further deposits and build up your savings pot without restriction.
However, if you put a lump sum of money in a fixed bond, you may not be able to add to it after your initial deposit. Some fixed bonds may only allow you to make one deposit at the time of opening the account, but others may offer a small window to make any additional deposits. After this period, which could be as short as seven or 14 days, you won’t typically be able to add to your savings.
Before putting a lump sum into savings, it’s always worth checking the terms of the account to see if you’re allowed to make any additional contributions.
It should be quick and straightforward to use our lump sum investment calculator.
You need to fill in the relevant boxes with:
You can then click “Calculate” to see what your money will be worth after the specified period.
This calculator is based on a number of assumptions so it’s possible that the amount of interest you earn could differ from the figure shown above. However, the calculator can still act as a useful guide.
Firstly, the calculator assumes that the interest rate is fixed for the whole period and is paid yearly.
As a result, it won’t account for any changes in interest rate, which may happen if you deposit your money in a variable account. Providers can increase or lower the interest rate on these accounts as they choose, which means you could earn more or less interest than the calculator shows.
Moreover, the calculator doesn’t account for any deposits to or withdrawals from your initial lump sum deposit that you may make during the term; it assumes that you will only make one deposit and will leave your money untouched for the length of the term.
When interest compounds, it means that interest is paid on the interest you’ve already earned.
For example, let’s say you earn £40 in interest on a £1,000 lump sum in one year, at a rate of 4.00% per year. Compounding interest means interest will then be paid on £1,040 in the second year (your initial deposit plus the interest from year one), so you would earn around £41.60 in interest, taking your total balance to £1,081,60. In the third year, you would then earn interest on £1,081.60, and so on.
Because you earn interest on interest, there is a snowball effect as interest is paid on an increasingly bigger sum each year. Most savings accounts pay compound interest.
By contrast, simple interest is when interest is only paid on the money you deposit. So, using the example above, you would only earn £40 interest each year on your £1,000 deposit; there would be no snowball effect.
If you have a lump sum to put into savings, the best account for you will depend on your situation. It’s also worth bearing in mind that you can split your lump sum over a combination of accounts instead of putting it all in one account.
Easy access accounts may be a suitable option for some, or all, of your lump sum if you want to be able to withdraw your money at short notice. This could help you to create an emergency fund, if you haven’t got one already.
Alternatively, you could consider a notice account which may pay a higher rate than an easy access account. With these accounts, you need to wait the specified notice period before you can access your money.
However, if you won’t need to access your lump sum for six months or more, it’s worth considering a fixed bond. These pay a guaranteed rate for the agreed period, unlike easy access and notice accounts which pay a variable rate.
If you have a lump sum of money to deposit, you don’t need to put it all in one account.
In fact, depending on how much you want to deposit, it may make more sense to split your money between different providers to ensure you are fully covered by the Financial Services Compensation Scheme (FSCS). This scheme covers all the money held with a provider (or multiple providers if they share a banking licence) should it go bust, up to a maximum of £85,000 per individual. Because of this cap, if you have more than £85,000 to deposit, it may be worth dividing it between different providers.
It's also important to consider your individual situation and savings goals when deciding what to do with a lump sum. For example, you might choose to put some in an easy access account, so you can dip into it if you’re faced with an unexpected expense, and lock the rest away in a fixed bond to earn a guaranteed interest rate.
You might also choose to split your lump sum between fixed savings accounts with differing terms, ranging from short to long, so you can access a portion of your savings at regular intervals while the rest is still locked away earning interest.
If you have a lump sum, it’s likely to be better to deposit it as a lump sum instead of depositing a portion of it into savings each month. By depositing it as a lump sum, you can earn more interest than if you gradually built up your savings by making monthly payments into an account.
As a result, regular savings accounts, which typically require a minimum payment each month, are unlikely to be suitable if you have a lump sum you want to deposit into savings.
See our monthly savings calculator to see how much interest you could earn by making a regular deposit each month.
Don’t forget that you may need to pay tax if the interest you earn on your savings breaches your Personal Savings Allowance (PSA).
As a result, it may be worth putting some, or all, of your lump sum into an Individual Savings Account (ISA) which allows you to save up to £20,000 per year tax-free. There are easy access ISAs and fixed-rate ISAs available, depending on your preferences.
As well as depositing your lump sum into savings, you could also consider putting it into your pension or a stocks and shares ISA. However, remember that if you invest your money, its value could go down as well as up.
If you have a mortgage or you’re currently paying off other debts, such as a loan or credit card, you could use your lump sum to pay off some or all of this debt. See our guide on saving or paying off your mortgage.
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