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Best way to invest £100k to generate income

If you have £100k to hand, you may be looking to invest it to turn a profit.

With so many different ways to invest, though, you may be asking yourself: what is the best way to invest £100k to generate income?

In this guide, I’ll tell you everything about the best ways to invest your £100k.

Also consider: The best way to invest 50K

Key takeaways

  • You can invest your £100k in various different ways, including through company shares, funds, bonds, property, and peer-to-peer lending.
  • While some of these investment methods are better for income, such as dividends from funds or rental payments from a property, others offer the chance to invest for growth, like company shares appreciating in value.
  • There are various different accounts through which you can invest your £100k, including a Stocks and Shares ISA, General Investment Account (GIA), self-invested personal pension (SIPP), and more.
  • Of course, if you still aren’t sure how to invest your £100k, you can always contact a local financial advisor for assistance.
Best way to invest £100k

5 best ways to invest £100k

There are plenty of different choices, so what’s the best way to invest £100k?

While one isn’t comparatively “better” than the others, each different form of investing comes with different benefits and downsides, so keep reading to find out exactly what these are.

1. Company shares

Individual company shares are what most people first think of when they’re considering investing, but is this the best way to invest £100k?

When you purchase shares in a company, you are, in essence, buying a very small part of that company. This means that if the company performs well, the value of your investment will typically rise too, provided that market conditions are favourable.

Those who invest in company shares typically generate income by selling them at a higher price than they were purchased for. Often this is by holding them for long periods of time to turn a profit over the long term.

Certain companies may also offer dividends, which are regular payments from a company’s earnings that are paid to shareholders. This can be a great way to earn a consistent income from your investments, so it is worth keeping an eye out for companies with a high dividend yield rate. In fact, historically speaking, even during periods of recession, dividend shares have shown growth.

As is the case with all investing, company shares come with risks. To avoid as much risk as possible, your investment portfolio should be well diversified, and you should read as much industry news as possible so you can stay up to date with new information.

2. Funds

Instead of just investing in a single company, funds allow you to invest in a spread of companies and other assets all at once.

Funds, sometimes referred to as mutual funds, are a type of pooled investment portfolio that in turn make investments with the money you put in.

It is usually an expert fund manager who makes the investment decisions in a fund. They will typically do plenty of research, have a firm understanding of markets, and try to keep the fund diversified to mitigate risk.

The performance of the fund usually depends on the performance of the constituent investments within the fund.

After you invest in a fund, you are typically paid back in dividends, the value of which depends on the performance of the fund.

Investors may also speculate with funds by selling units in them for a higher value than they purchased them for. However, funds are typically more suited for long-term, passive investing.

One of the amazing things about funds is the diversification on offer – since the fund manager will diversify the portfolio as much as possible, you are technically getting in on this diversification with just a single investment.

There are several different types of funds, each with their own set of benefits, so keep reading to find out what these are.

Exchange-traded funds (ETFs)

An ETF is one of these variations of a fund that tracks the performance of a particular index, commodity, or sector.

They act much like regular company shares in that they are traded on the same marketplaces and the price fluctuates throughout the day.

Although they are great for tracking a specific security, ETFs may come with higher costs and fees. You will typically be required to pay a management fee, which covers the day to day running of the fund.

On the bright side, the risk involved with an ETF tends to be far lower than with other types of investing. This is because they tend to be linked to a basket of securities, meaning they are well-diversified which allows fund directors to manage risk.

Index tracker funds

Index tracker funds are directly linked to a specific stock market index, like the FTSE 100, for example.

This means the price of the index tracker fund is based on the performance of the constituent companies in the index, which is called the net asset value (NAV).

This makes index tracker funds ideal for passive, long-term investing. Since they stick to the constituents of a stock index, they don’t even need as much management from the fund provider, meaning management fees could be lower.

Another distinct difference between ETFs and index tracker funds is that the latter can only be traded for the price set at the end of the day.

You can, of course, make the trade at any point, but it won’t officially be completed until the end of the trading day, meaning you can’t capitalise on shorter swings in value of fund units.

Which funds are best to invest in?

You have lots of options when it comes to funds, but which is the best to invest in?

If you have a low risk tolerance and would prefer to invest over the long term for a passive income, an index tracker fund may be right for you.

You might want to consider investing in an ETF that tracks a major stock index, such as the FTSE 100 in the UK or the S&P 500 in the US. Since the constituent companies in these indices are the businesses with the largest market capitalisation, they potentially have the best chance of performing well.

However, if you would prefer to speculate on funds, or invest in one that tracks a different type of security, such as a commodity, then an ETF may be more suited for you.

Should you invest in shares or funds?

Again, this depends on your interests, your reasons for investing, and what your portfolio already contains.

Funds tend to be more suited for those that prefer passive investing over a longer period of time.

Individual shares, however, have the potential to generate faster growth, though this is typically a riskier approach and could see your investments lose value if you make poor decisions.

Since a well-diversified portfolio is essential to mitigate risk, you may want to try and create a balance between individual shares and funds.

This way, should a specific sector experience a market downturn, your other investments may offset any negative effects.

3. Bonds

It is also possible to invest in bonds, which involve loaning money to an issuer with the promise of returns.

Again, there are several different types of bonds available, each with their own benefits, so continue reading to discover what each type brings to the table.

Premium Bonds

Premium Bonds are a type of government security that offer a potentially exciting way to invest your money.

Think of them like a lottery – you are given the chance to win a tax-free cash prize that ranges in value from £25 to £1 million.

Instead of paying a guaranteed interest rate, Premium Bonds instead offer you the chance of winning these cash prizes. The lowest prize of £25 has odds of 1 in 24,500, while the highest prize of £1 million has odds of more than 1 in 57 million.

Even though it may seem unlikely that you will win a cash prize, these odds are for each £1 bond you own, so the more you own, the higher your chance of winning.

The maximum amount of Premium Bonds you can hold at any given time is £50,000, and they’re entirely safe and backed by the government.

Government bonds

Government bonds, sometimes called gilts, are a type of bond in which you “loan” money to a government.

When you invest in gilts, you are usually given a maturity date that varies depending on the type of gilt you invested in. When this date has been reached, your bond will expire and your initial investment will be returned to you.

You’ll receive interest payments throughout in the form of a guaranteed income stream, which are called “coupon payments”.

The stability of a bond typically depends on the stability of the issuing government. Gilts offered by the UK government, for example, tend to be some of the most stable in the world.

Read my comprehensive guide on UK Treasury bonds to find out more about gilts.

Corporate bonds

As the name suggests, corporate bonds instead involve “loaning” money to a business rather than a government.

These allow companies to raise capital for any planned projects they have; issuing bonds allows them to raise more money than banks will typically loan them.

When compared to government bonds, corporate bonds typically offer higher interest rates.

The trade-off for this, however, is that corporate bonds tend to be riskier than government bonds, as companies are generally less stable than governments. As a result, if the company fails entirely before paying you back, you could lose your entire investment.

Which type of bond is the best to invest in?

This depends on what you want to get out of your investments.

If you are looking for a lower-risk, long-term investment, then government bonds or Premium Bonds may be more suited for you.

However, if you would like to invest in bonds that offer more potential gains at the cost of more risk, then corporate bonds may be what you’re looking for.

4. Property

If you are looking for avenues to further diversify your portfolio, then investing in property could be the solution for you.

Of course, with £100k, you likely won’t be able to purchase an entire property outright, but you could use it to put down a deposit when buying with a mortgage.

There are two main ways you can make money from your investment property.

Firstly, you could make money from rental income by buying and renting property as a buy-to-let (BTL) landlord. Even if you don’t have the time to manage the property yourself and collect rent, you could always hire a property management company to deal with this.

Otherwise, you could always just wait for your property to appreciate in value. The UK housing market has experienced impressive growth over the past few year, so this may be a viable solution to making an income from property you’ve invested in.

In fact, the property market is typically seen as “slow and stable”, since property isn’t actively traded on an exchange, which helps prevent prices from fluctuating too much.

These constantly rising housing prices in the UK can be a double-edged sword, however, as investing in property can be expensive. As well as high upfront property costs, you may have to pay taxes, maintenance costs, and admin fees if you decide to rent it out.

5. Peer-to-peer lending

Peer-to-peer lending (P2P) is, as the name suggests, a type of lending that allows people to obtain loans from other individuals.

This cuts out the middleman of banks and building societies completely, meaning both parties don’t have to deal with any financial institutions.

P2P websites connect prospective lenders with borrowers, and the former will give the latter a loan.

As the lender, you’d then hope to make better returns from interest payments from the borrower than you would receive by saving your money in the bank.

You should keep in mind, however, that P2P lending can be risky – the default rates for P2P loans are far higher than traditional loans and there aren’t many P2P lending websites currently available.

What type of investing will generate the best returns?

Typically, there are two types of investment strategies: investing for income and investing for growth.

While you can balance your investments between both income and capital growth, each comes with its own set of benefits.

Investing for income

If you are looking for regular returns, then you will probably be looking to invest for income.

If you want to invest for income, some methods to do so include:

  • Dividends, either from shares or funds
  • Bond payments, also known as coupon payments
  • Income from a rental property
  • Interest from P2P lending.

As you can see, these types of investments would all supply a regular income, rather than waiting for them to appreciate in value.

Investing for growth

Speaking of waiting for investments to appreciate in value, investing for growth involves investing in order to grow your capital over a period of time.

Ideally, you want to look for investments that will increase in value and show promise for growth in the future, which could include:

  • Company shares that grow in value over time
  • Fund units that increase in value over time
  • Increasing property prices.

Although you may have to do some research before investing for growth, if you are investing over longer periods of time, then investing for growth could be the right strategy for you.

Places you can hold your 100k

When you’ve figured out how you want to invest your £100k, you next need to figure out the type of savings or investment account you will hold it in.

Again, you have plenty of options to choose from, so continue reading to figure out which type of account would best suit your needs.

Remember: whichever account you choose, make sure your provider is covered by the Financial Services Compensation Scheme (FSCS).

The FSCS will pay compensation of up to £85,000 to you if the institution you hold your money with fails and is unable to pay out.

Stocks and Shares ISA

A Stocks and Shares ISA is a type of ISA that allows you to trade securities.

This doesn’t just mean individual company shares, either, as they typically allow you to purchase:

The main benefit of a Stocks and Shares ISA is its tax “wrapper”. When you make investments through your Stocks and Shares ISA, you are completely protected from Income Tax, Dividend Tax, and Capital Gains Tax (CGT).

You should keep in mind, however, that there’s an annual ISA allowance each tax year, which stands at £20,000 in 2022/23.

This applies to all different types of ISA too, meaning if you invested £16,000 in your Stocks and Shares ISA, you would only have £4,000 left to invest in another separate ISA.

As a result, you wouldn’t be able to invest your entire £100k in an ISA in a single tax year. Of course, you could invest £20,000 of it each year for five years to hold it all in an ISA.

Regardless, being Income Tax, CGT, and Dividend Tax-free could make a Stocks and Shares ISA the perfect place to invest a part of your £100k.

General Investment Account

As mentioned, there is a £20,000 ISA allowance that applies to all your tax-efficient accounts. So what do you do with the rest of your £100k?

Well, you can always open a General Investment Account (GIA). These are similar to Stocks and Shares ISAs in that they allow you to trade securities, with just a few differences.

For one, there is absolutely no limit to the amount of money you can deposit in a GIA. This means that, if you’ve reached your ISA allowance, you will have somewhere to store the rest of your £100k.

Unfortunately, GIAs aren’t as tax-efficient as ISAs. You will typically be subject to CGT if you make a profit above your annual CGT exempt amount, which, as of 2022/23, stands at £12,300.

Once you go over your CGT allowance, the rates are as follows:

  • 10% (18% on property that isn’t your main residence) for basic-rate taxpayers
  • 20% (28% on property that isn’t your main residence) for higher- or additional-rate taxpayers.

Dividend Tax may also become an issue with a GIA. Thankfully, you have a £2,000 tax-free Dividend Allowance in the 2022/23 tax year, though anything earned in dividends above this may be subject to Dividend Tax, the rates of which are:

  • 8.75% for basic-rate taxpayers
  • 33.75% for higher-rate taxpayers
  • 39.35% for additional-rate taxpayers.

Since ISAs are more tax-efficient, you may want to consider using your entire ISA allowance before you start investing through a GIA.

Self-invested personal pension (SIPP)

A self-invested personal pension (SIPP) could be a useful way to build your retirement savings using your £100k.

SIPPs are types of retirement accounts that give you a great amount of control over how your money is invested. They usually allow you to invest in a large range of securities, of which property is included.

A SIPP is relatively tax-efficient too, as any money invested in one is protected from Income Tax and CGT.

Better yet, you also receive tax relief at your marginal rate of Income Tax on any contributions you make.

You can make contributions and receive tax relief up to the pension Annual Allowance each tax year, which is the lower of £40,000 or up to 100% of your earnings in 2022/23.

Savings account

Of course, if you just wanted to save your money in a normal savings account, then there is nothing stopping you from doing so.

You should keep in mind though that interest rates are typically uncompetitive as of June 2022 due to high inflation.

For example, as of 7 June, an easy-access savings account would only give you an interest rate of 1.52% according to the Moneyfacts website.

Since the Office for National Statistics measured the inflation rate to be 9% in April, this means your savings’ purchasing power would be gradually eroded over time.

How much interest does £100k earn?

How much interest you’ll earn will depend on the type of account you choose.

If you were to save your entire £100k in the above easy-access savings account with a yearly interest rate of 1.52%, your £100k would earn £1,520 after a year.

Meanwhile, if you were to invest your entire £100k in a five-year fixed-rate savings account which, according to Moneyfacts, would offer 2.9% as of 7 June, you would earn £2,900 each year.

Not sure how to invest? Seek independent financial advice

Of course, investing can be tricky to get your head around, even with all the information included in my guide.

That’s why, if you are ever in any doubt about how to invest, then you should seek the help of an independent financial advisor.

If you want to speak with a financial advisor but aren’t sure where to turn, you can always use the tool on our website that allows you to find the financial advice you need from someone local.

Best way to invest 100k FAQs

What is the best way to invest 100k?

The best way to invest £100k depends on your reasons for investing in the first place.
If you are looking to make a long-term passive investment that needs little input, then an ETF, index tracker fund, or government bonds may be your best bet.

However, if you would like to invest more actively, and potentially achieve greater gains at the cost of higher risk, then individual company shares or corporate bonds may be what you’re looking for.

Where will your 100k get the best returns?

The best returns on your £100k will depend on how you want to invest, and whether you’re looking to invest for growth or income.
Historically speaking, bonds tend to offer decent returns, and they pay a regular coupon payment which could supplement your income.

However, depending on how markets are performing, a fund that tracks an index, or just the individual constituent companies, could offer decent growth, and in turn, returns.

Please note

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall risk appetite and financial circumstances.

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