How to invest £10k to get the Best ROI

Have you recently received a work bonus, or perhaps an inheritance, and you’re suddenly wondering what to do with £10,000? If this is the case for you, you may be considering investing this money.

With so many choices, though, you may not be sure what the best methods of investing are. My guide will help you discover a few different avenues you can take to help you decide what to do with £10k to get the best ROI.

Also consider: Best Stocks and Shares to Buy Now

Where to invest £10k

As mentioned, there are plenty of different places you can invest £10k. Each different choice has its own benefits and downsides though, so keep reading to find out what these are.

Stocks and Shares ISA

As the name may suggest, a Stocks and Shares ISA is a type of ISA that allows you to build a portfolio of investments.

You have a wide variety of investment options if you choose a Stocks and Shares ISA. This includes:

• Individual company shares
• Bonds
• Unit trusts
• Exchange-traded funds (ETFs)
• Index funds
• Investment trusts.

The beauty of a Stocks and Shares ISA lies in their tax efficiency. When you invest money in a Stocks and Shares ISA, your investments are protected from Income Tax, Dividend Tax and Capital Gains Tax (CGT) thanks to its tax “wrapper”.

And, because the ISA allowance is currently £20,000 in the 2022/23 tax year, you can comfortably invest your entire £10k sum of money with allowance to spare.

These types of ISA are perfect for those who want to target potential growth on their investments while keeping them tax-efficient.

General Investment Account

If you have already reached your annual ISA allowance, you might want to consider investing your £10k in a General Investment Account (GIA).

GIAs also allow you to trade in a wide variety of assets, and better yet, there is absolutely no limit to the amount of money you can deposit.

Unlike ISAs, however, investments made in a GIA will typically be subject to CGT if you make a profit above your annual CGT allowance – which as of 2022/23, is £12,300. CGT rates are:

• 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.

You may also face Dividend Tax if you earn dividends through your GIA. The good news is the first £2,000 earned from dividends falls within your tax-free Dividend Allowance in the 2022/23 tax year, though you should keep in mind that the allowance amount could change in future years.

However, any dividends earned above this amount are taxable. The Dividend Tax rates are:

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

It can be sensible to make the most of your ISA allowance first to avoid being subject to Dividend Tax.

Lifetime ISA

If you’re saving for either your first home or towards retirement, then a Lifetime ISA (LISA) could be just what you’re looking for.

You can invest up to £4,000 each year in your LISA and, better yet, the government pay an extra 25% bonus on deposits. This means you could get up to £1,000 from the government each tax year. So, while you can’t put your entire £10k lump sum into a LISA, it could be the right place for the first £4,000 of it.

You can save in a Cash LISA or invest your money with a Stocks and Shares LISA. And, as with other types of ISA, your money and investments are protected from Income Tax, Dividend Tax, and CGT.

You will, however, face a 25% withdrawal fee if you withdraw your money for anything other than the deposit for your first home, or before you reach the age of 60. So, make sure you intend to use the account for this purpose.

Of course, the £20,000 annual ISA allowance still applies to a LISA, but it is spread between all your active ISAs. This means you could invest £4,000 of your £10k in your LISA, then £6,000 in your Stocks and Shares ISA and still have some of your annual ISA allowance left over.

Self-invested personal pension (SIPP)

Instead of investing your £10k in an investment account, you might want to start thinking about retirement and put it into a self-invested personal pension (SIPP) instead.

SIPPs are a type of personal pension that give you more flexibility and control over how your money is invested. They typically allow you to choose from a range of different assets, including company shares, investment trusts, and even commercial property.

If tax efficiency is your goal, then a SIPP won’t disappoint: money invested in a SIPP is protected from Income Tax and CGT.

Contributions also receive tax relief at your marginal rate of Income Tax. This means a £100 contribution to your SIPP will only “cost” you:

• £80 if you pay basic-rate Income Tax.
• £60 if you pay higher-rate Income Tax.
• £55 if you pay additional-rate Income Tax.

If you do pay higher- or additional-rate Income Tax, you’ll need to claim the additional tax relief through a self-assessment tax return.

You will even be able to deposit your entire £10k in a SIPP too – you can make a maximum contribution tax-efficiently of £40,000 each year or up to 100% of your earnings, whichever is lower.

So, provided you haven’t already used up all your Annual Allowance, a SIPP could make a good home for your £10k.

Should you just keep your money in a savings account?

Of course, rather than investing any or all of your £10k, you could just deposit it into a normal savings account. Doing this tends to be far less risky than investing and will be far less hassle.

However, while this may be less stress-inducing than investing, chances are your money will lose some of its purchasing power due to high inflation and low interest rates.

As it stands on 31 May 2022, the inflation rate is 9%, and the best interest rate you can get on a savings account is 1.56% with an easy-access savings account.

Since this interest rate is lower than the rate of inflation, having large sums of money saved there means it could lose its purchasing power over time.

What can you invest £10k in?

When it comes to investing, most investors initially think of buying company shares on the stock market.

While this is a common way to invest, you have plenty more to choose from when it comes to deciding how you want your £10k invested, so continue reading to discover what you can invest in.

Shares

When you purchase shares, it is much like buying a stake in a company; when the company performs well, typically so does your investment.

When it comes to making money with shares, investors can either speculate by selling their shares when they are worth more than they bought them for, or by buying and holding them for long periods of time.

Depending on the company you invested in, you can even earn money from dividends. These are cash payments from a company’s earnings that are paid to shareholders.

As with all types of investing, purchasing individual companies does come with risk. You should ideally keep on top of industry news to try and predict then capitalise on any movements in the market.

Which companies are best to invest your money in?

The best companies to invest in wholly depend on your reasons for investing in the first place and your interests.

For example, you might want to invest in a company you’re passionate about. Or, if you want to make sure your money is invested socially responsibly, you might want to invest in a company with good environment, social, or governance (ESG) credentials.

Additionally, you might want to invest in typically reliable blue-chip companies, such as those listed on the FTSE 100 stock index.

You should read my weekly share tip guide if you want some advice on some of the best companies to keep an eye on.

Funds

Rather than investing in a single company, you could always invest in a fund instead.

A fund is a type of pooled investment portfolio that makes investments with the money you pay in.

Fund managers, who are usually experts in the financial field, will make investment decisions on your behalf, typically ensuring they hold a diversified portfolio to spread risk.

You are then paid back in dividends, the value of which depends on the performance of the fund. Profit can also be made by buying funds when the price of units is low, then selling when the value is higher than what you bought it for.

Since the fund manager will tend to try and diversify their portfolios as much as possible, investing in a fund is like instantly diversifying your portfolio with a single investment.

Should you invest in funds or individual companies?

Again, this all depends on your reasons for investing, your experience, and your tolerance for risk.

Since funds are typically lower risk and the investment decisions are made by professionals, they make much better passive investments for those who may not be as confident making their own investments.

Shares, however, do have the potential to offer higher returns, though you are typically required to be more involved by reading industry news and keeping on top of price changes, making them more active investments.

You might want to think about investing in a mix of the two. Your portfolio can never be diversified enough, so by buying both funds and shares, you can add an even greater range of investments to your portfolio.

Bonds

You also have the option of investing in bonds, and there are a few to choose from.

Premium Bonds

Premium Bonds are a type of government security that offer a fun, safe way to save your money.

Instead of paying guaranteed interest, Premium Bonds instead give you the chance to win a tax-free cash prize ranging in value from £25 to £1 million.

The lowest prize of £25 currently has odds of 1 in 34,500, and these odds will shorten to 1 in 24,500 in June 2022, increasing your chances of winning. The highest prize of £1 million, however, has odds of more than 1 in 57 million.

While these odds do seem astronomical, the average prize fund interest rate is around 1%, though this rate is set to be upped to 1.4% in June 2022. Better yet, since the odds are for each £1 bond you own, your odds of winning increase with the more bonds you hold.

The maximum amount of Premium Bonds you can hold at any given time is £50,000, so this could be an exciting way to invest your £10k. Premium Bonds are also entirely safe and backed by the government, so you can rest easy knowing your investments won’t lose value.

UK government bonds

UK government bonds, commonly referred to as gilts, are a type of investment where you “loan” money to the UK government.

Those who invest in gilts are typically given a maturity date. When this date is reached your bond will expire and your initial investment amount will be returned to you.

Better still, you are also paid regular interest throughout holding, which is called “coupon payments”.

Generally speaking, the stability of a government bond depends on the stability of the government itself. For example, the UK offers some of the most stable government bonds in the world, while more emerging markets, such as China, may offer higher returns, but the bonds will typically be less stable.

This is just a basic glance at gilts, so read my comprehensive guide to UK Treasury bonds if you would like to find out more.

Corporate bonds

Instead of loaning money to a government, corporate bonds instead involve lending your money to businesses.

Much like the government variations, corporate bonds allow businesses to raise capital for any projects they may have planned, and issuing bonds allows these businesses to obtain more money than the banks will loan them.

Corporate bonds typically offer higher interest rates compared to government bonds, though there is greater risk here as prices and interest rates could fluctuate more regularly since companies are typically less stable than governments.

Cryptocurrency

Instead of investing in a traditional manner, you might want to get involved in cryptocurrency instead.

Cryptocurrency is a type of digital, decentralised currency that can be used to make purchases with certain companies.

The main reason people trade crypto, however, is to speculate with it. Cryptocurrencies tend to be very volatile, so while you might be able to capitalise on market movement, you could end up losing money too.

Some of the biggest cryptocurrencies that are available to buy are bitcoin and ethereum, and when you have purchased them from a crypto exchange, you can hold onto them for as long as you like.

Read my guide to buying cryptocurrency to find out even more.

How to invest £10,000

Before you decide where you want to invest your money, you should first figure out your reasons for investing.

Figure out your investment timeframe

This involves you deciding how long you want to keep your money invested. Typically, the longer you wait, the higher chance you have of better returns.

If you want to invest for a shorter period of time, such as less than five years, you may want to consider investing in something other than company shares, like bonds.

Ensure your portfolio is diversified

Keeping a well-diversified portfolio is essential if you want to minimise risk.

This could mean either spreading your investments in stock markets across several different sectors, industries, and geographical locations, or buying a mix of different assets, such as shares and funds.

Of course, sometimes there’s nothing you can do to avoid a market downturn. For example, no one could have predicted Covid and the seriously detrimental effects it would have on markets across the board.

Even so, diversification is a useful tool to help spread risk across your portfolio.

Decide whether you want to invest passively or actively

As previously mentioned, you can usually make investments that are either passive or active.

Buying individual company shares, for example, is an active investment. This is because you need to ideally stay constantly updated about industry news and monitor any price changes.

Funds, such as an index fund that tracks the FTSE 100, are passive investments, as little to no input is required from you. These types of investments may be better for those who are less confident making their own investment decisions, or even for people that simply don’t have the time to be checking their investments.

Things you should consider before you invest £10k

Of course, before you even get around to investing your £10k, there are some important things you might want to consider. Continue reading to find out exactly what these considerations are.

Pay off any outstanding debt

You should ideally always pay off any outstanding debts you may have before you think about investing.

By doing so, you could potentially avoid paying interest on any loans you have, and you will get some peace of mind knowing your affairs are in order.

Build an emergency fund

You can never be too prepared, so you might want to use your £10k to build an emergency fund to cover you in case of a financial emergency, such as being made unemployed.

Depending on your circumstances, you should ideally have somewhere between three to nine months’ worth of household expenses saved.

This way, should an emergency arise, you will have a safety net to cover your living costs.

You should ideally save your emergency fund in an easy-access savings account. Doing so will ensure that you can access your money as quickly as possible.

What to do with £10K FAQs

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 attitude to risk and financial circumstances.

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. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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.