How to invest £250,000

Clear debts first

Before you invest £250,000, it makes sense to pay off any expensive debts first. 

The interest rates on credit cards and personal loans are likely to outstrip money you’ll make investing.

Asset allocation for £250,000

Diversification is key to long-term investment success. By spreading your wealth across a broad range of assets and investments, you reduce the risk of one poorly performing investment bringing your whole portfolio down. You’ll also find that different assets perform differently throughout the economic cycle. 

Most well-diversified portfolios should include the following asset classes: cash, fixed-interest and stocks and shares. 

Cash: Savings accounts are low risk, in so far as you’ll always earn interest on your balance. However, over time its value is likely to be eroded by inflation, meaning you could lose money in real terms. 

However, it’s still important to have some money in easy access accounts. As a starting point aim for three to six month’s expenses as a rainy-day fund. But you should also think about any major expenses you’ll have over the next few years including holidays, cars, house deposits or building work. Chances are you will want to enjoy some of your windfall.

A good rule of thumb is if you’ll need the money within the next five years, keep it in cash.

Fixed-interest securities: These are loans that pay a fixed-rate of interest. Corporate bonds are loans to businesses while gilts or government bonds are loans to governments.  It’s often helpful to think of fixed interest as a half-way house between cash and stock and shares. 

You can either buy individual bonds or funds that offer access to a bond portfolio.

Stocks and shares: When you buy a share you’re buying a stake in a company. As such, the value of your holding will rise and fall with the performance of that business.

Shares are higher risk than fixed interest and cash, but they offer the greatest potential for growth.  For this reason, it’s generally recommended that you only invest money into stocks and shares that you can tie up for at least five years. This will give your money time to ride out short-term volatility and benefit from compound returns. 

You can buy shares in individual companies but it can be tricky (and expensive) to get the level of diversification you need.

It’s cheaper and easier to buy collective investments like funds, that invest in a portfolio of shares on your behalf.

These are the key assets most investors use, but with £250,000 to invest, you may also have scope to consider other asset classes too.

Property: With £250,000 to invest you might consider buying a rental property. However, a buy-to-let can be time consuming and costly to manage, with rising taxes making it increasingly difficult for amateur landlords to make money.

Commercial property, however, can be easier to access. Funds that buy properties including retail outlets, warehouses and entertainment venues, can pay a reliable income and be a great diversifier.

Commodities: These are investments in natural resources, for example metals, oils and agricultural products. The most common commodity for investors to turn to is gold as it holds its value well.

You can buy commodities directly, with a fund or by using an ETC (exchange traded commodity) which enables you to buy exposure to a single commodity on the stock exchange.

There’s no textbook asset allocation for £250,000. What’s right for you will depend on factors including your need for cash and your attitude to risk.

The more money that is allocated to stocks and shares, the higher risk it will be. Normally, the longer you have until you need your money, the more risk you can take. You can always reduce the risk profile of your portfolio by altering your asset allocation over time.

Building your own portfolio

An online investment platform makes it easy to build your portfolio.

Interactive Investor offers access to:

• Shares
• Funds
• Investment trusts
• ETFs and ETCs
• Fixed interest (bonds and gilts)
• Venture Capital Trusts

When you’re looking at a platform, it’s important to check it offers the guidance and tools you need to make the right investment decisions.

If you aren’t sure what investments to choose we have plenty of ideas to get you started including Quick-start Funds and the Super 60 list of rated funds.

It’s also a good idea to compare costs, which can put a drag on your returns. 

Interactive Investor offers a choice of flat-fee options. This means that, unlike percentage-based charges, your costs don’t rise as your investment grows.

Investing £250,000 tax-effectively

Investment platforms offer a choice of accounts. Although each will offer access to the same range of investments, the tax treatment will differ. This means you need to select your accounts wisely.

• Stocks and shares ISA: Any money you invest in an ISA is tax-free. That means no tax will deducted as it grows or when you make withdrawals. Although this money should be invested for the long term, access isn’t restricted. The downside, if you have a big windfall, is that you can only invest £20,000 a year. 
• Junior ISA: You can also invest up to £9,000 a year tax-free for children with a junior ISA.
• SIPP: Money invested into pensions benefits from tax relief equivalent to the rate of income tax you pay and is sheltered from tax as it grows. When you start taking money out, you can also take 25% tax free (up to a maximum of £268,275). However, you can only invest 100% of your income (up to a maximum of £60,000) each year. You can use your pension as you wish, but can’t access it until you’re 55 (rising to 57 in 2028).
• Trading account: This is a basic account for buying and selling investments. You can access your money whenever you want but there’s no preferential tax treatment, meaning you could be subject to tax on dividends and capital gains. Normally it only makes sense to use a trading account once you’ve used your ISA allowance.

You won’t be able to shelter all your £250,000 from tax with ISAs and pensions. However, there are steps you can take to protect more of your wealth.

• Join forces with your partner:  Couples can shelter £40,000 from tax by using both their ISA allowances. Married couples and civil partners can also transfer assets between each other without incurring CGT. This makes it easier to use both your CGT allowances. You could also pay into your spouse’s pension if you’ve reached the annual allowance.
• Bed and ISA: You can shelter more of your investments from tax over time by using Bed and ISA rules. This allows you to sell investments and rebuy them within your ISA.  You just have to take care that the transfer doesn’t trigger a CGT liability.
• Bed and SIPP: You can also take advantage of similar Bed and SIPP transfers to move investments from a trading account into your pension. Just ensure you’re not paying in more than 100% of your income to remain within the annual allowance rules.
• Use carry-forward rules: If you haven’t used your whole pension allowance in previous years, you may be able to carry forward unused allowance from the last three years.
• Consider VCTs: Venture capital trusts are another investment with significant tax breaks. To incentivise investment in Britain’s smallest businesses investors can get tax relief of 30% on contributions up to £200,000, so long as the investment is held for five years. They are high risk though as the risk of small business failure is significant. This means they should only be considered by wealthy individuals who have exhausted their ISA and pension allowances and have an aggressive attitude to risk.
  

Do I need financial advice to invest £250,000?

There’s no requirement to take advice to invest £250,000. However, the more money you have to invest, the stronger the argument for advice.

An independent financial adviser, or IFA will create a financial plan for you that will help you achieve your financial goals and structure it in a way that shelters as much of your wealth from tax as possible.

They can also help you with estate planning and inheritance tax which becomes increasingly important as your wealth grows.