What’s the best way to invest £5000 UK?

What is the best way to invest £5,000?

£5,000 is a good amount of money to start investing with, so consider diversifying your investment strategy by utilising a number of different investment methods and asset classes.

You could invest money directly in the UK stock market or global emerging markets, invest in tax-efficient vehicles like ISAs or SIPPs, or even open a Lifetime ISA and benefit from a 25% government bonus.

However, it is crucial to make sure you understand all of the different methods of investing before choosing how you wish to invest your money.

General Investment Account (GIA)

One of the most common ways to invest in the UK is through a General Investment Account (GIA) which is essentially an account to hold all your investments without limits.

There’s no cap on the value you can add to your GIA each year. For example, with a GIA, you can invest money into stocks and shares, trusts, and various funds, such as exchange-traded funds or index funds, without limits.

If you were to invest in these things with “tax-wrappers”, such as a Stocks and Shares ISA, you may have annual contribution or drawing limits. Most investment apps will offer a GIA alongside other tax-efficient accounts, too.

Your GIA will differ depending on the provider you choose

Every app or investment platform approaches investing differently and offers a variety of tools and resources for investors on the platform to use.

Apps like CIRCA5000 and eToro offer investment themes, where an investor can put money towards a group of investments collected together under an umbrella term.

For example, an investor may want to invest in a theme like “technology”. All of the underlying investments in that theme will revolve around technology and the future, like AMD or Tesla.

Investing £5,000 into a GIA will help you set up a fleshed out and diversified portfolio right off the bat, allowing you to avoid putting all your eggs in one basket. By investing in several different asset classes, you could help protect your wealth against market downturns and poor economic performance.

Stocks and Shares ISA

A Stocks and Shares ISA is an account that allows you to invest your savings in the stock market. In many ways, a Stocks and Shares ISA is similar to a GIA. However, there are a few key differences.

Firstly, any returns earned on the funds in a Stocks and Shares ISA are protected in a tax-efficient tax wrapper, meaning that you need not pay Capital Gains Tax or Income Tax on your profits.

However, a Stocks and Shares ISA is not entirely tax-free, as your beneficiaries may have to pay Inheritance Tax (IHT) on it if they inherit from you on your death.

Secondly, every individual has an ISA allowance of £20,000 spread among all of their ISAs for the tax year. This means you cannot contribute more than £20,000 into your ISAs in any given tax year.

For more experienced investors with a large and diverse portfolio, this could make it more difficult to manage your investments efficiently. You may need to open multiple accounts of different types in order to measure the performance of your investments.

Many DIY apps, investment platforms, and online brokers offer their own Stocks and Shares ISAs, allowing you to pick and choose the account that works best for you.

Investing £5,000 into a Stocks and Shares ISA allows you to benefit from the £20,000 ISA allowance, meaning you will not need to pay tax on your returns.

Lifetime ISA

Another savings account often overlooked when discussing investments are Lifetime ISAs. Lifetime ISAs can be opened as either a Cash or Stocks and Shares account, meaning you can either store your funds with a bank or building society, or invest them in the stock market.

Lifetime ISAs are exclusively available for 18- to 39-year-olds who are saving towards a first home or making an early start on their retirement fund.

Crucially, you’ll receive a 25% government bonus on all contributions up to the annual contribution limit of £4,000 each tax year, which counts towards your overall annual ISA allowance.

That means, if you make the full subscription in a tax year, you’ll receive £1,000 in government bonuses.

So, if you have £5,000 to invest and you are looking to save towards either of these goals, then a Lifetime ISA may be the perfect account to open. You’ll receive an additional £1,000 in government bonus, and still have a further £1,000 to save or invest elsewhere.

Returns as high as 25% are very few and far between on investments, and you could even open a Stocks and Shares Lifetime ISA if you wanted to try and generate some returns on top of your savings, too.

Bear in mind that you cannot contribute to a Lifetime ISA past the age of 50 and any funds paid into the account must then be used towards a housing deposit or left until you turn 60.

If you withdraw money from the account for any other reason then you will be charged a 25% withdrawal fee. This means you will lose the government bonus and a little extra on anything you withdraw.

Personal pensions

A personal pension, such as a self-invested personal pension (SIPP), could be a very effective home for your £5,000 lump sum.

A SIPP is a pension pot that is entirely managed by you. With a SIPP, you have full jurisdiction over where you invest your savings, while still receiving all the regular tax benefits of a standard employer pension.

Provided that you haven’t already exceeded the pension Annual Allowance in the tax year you’re making your contributions in, funds you add into your SIPP will benefit from tax relief at your marginal rate of Income Tax.

This means that a £100 SIPP contribution only “costs”:

• £80 for basic-rate taxpayers
• £60 for higher-rate taxpayers
• £55 for additional-rate taxpayers.

So, if you’re a basic-rate taxpayer, a £5,000 lump sum contribution to your pension will cost you just £4,000.

Because of this tax relief, pensions are often considered one of the best ways to invest for the future.

The guidelines of your SIPP will depend on your provider

Some, though not all, DIY investment apps offer a SIPP, each with their own fees and guidelines to adhere to.

For example, both Hargreaves Lansdown and interactive investor offer a SIPP.

Because your SIPP is accessible through the app you choose to go with, it is often easier to see at a glance how your pot is doing, rather than contacting the company in charge of a workplace pension.

If you choose to open a SIPP, make sure you consider the implications of choosing your own investment portfolio rather than going with an established workplace pension. Consider your risk appetite and make sure to invest money in a diverse range of assets.

Bear in mind that you won’t be able to access the money in your SIPP until you reach age 55, rising to 57 from 2028.

What to think about before you invest

Before investing your money, you should consider some reasons why investing may not be for you and make sure you fully understand the risks involved in doing so. Here are some things to think about.

Saving vs investing

Simply put, investing money is much riskier than saving money. By putting your savings in designated savings accounts, you are safely storing your money with the bank or provider you choose. Your savings will not reduce in value, although they may lose purchasing power due to inflation.

Meanwhile, by investing your savings, you are potentially putting your money into companies registered on stock markets across the world, and are opening yourself up to potentially lose money, depending on the economic performance of your investments.

The positive is that investing opens up the potential to generate a higher rate of returns than cash savings would earn in interest. This way, your money has the chance to outperform inflation.

Debt

If you have any sort of outstanding debt, it might be worth paying it off before investing on the stock market. This is because debts come with interest, which increases the amount you need to pay back over time.

By paying off your debt early, you could save a significant amount in interest. This could amount to greater savings than the returns you would have generated from investing instead.

Emergency fund

Another consideration you should take into account is whether you have enough saved in your emergency fund. An emergency fund is a separate store of cash designed to help you maintain your standard of living should you suffer from a sudden loss of income or expensive surprise payments.

Financial professionals recommend having three-to-six months’ worth of essential expenditure and living expenses in an emergency fund. This amount should give you plenty of time to find an alternative should you lose your income.

It is always better to be prepared for a financial emergency now than risking your capital and investing for potential gains in the future.

Your financial goals

Always consider your financial goals before making any investment decisions. Typically, financial professionals would recommend you only invest if the financial goal you are investing towards is a minimum of five years away.

When it comes to investing, the longer the better. This means that investing for personal and financial goals 10 or 15 years in the future could be a good idea, but your short-term goals are probably best saved for in cash.

Your financial situation

Before investing, consider whether you would be able to live without the money you are about to part ways with. Retrieving money from the stock market in emergencies could severely damage your returns and result in a loss.

Never invest money that you can’t afford to lose, as investing money on the stock market is always risky.

Your risk tolerance

Investing is always a risk. There is no guarantee that you will receive the same amount as you put in and it is entirely down to the performance of your investment portfolio.

The chance of losing money is down to how much risk you are willing to take with your investments. This is known as your risk tolerance and will dictate what investments you choose to go for.

High-risk investments typically offer an opportunity for higher investment returns but are often more volatile in terms of stock price, which means you could also lose money instead.

Low-risk investments tend to give lower returns but tend to be more stable and reliable in the market.

FAQs about investing in US shares

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.