What will you do with your windfall?

By JO THORNHILL
Updated:

 

How much disposable cash would it take to make you feel wealthy? Well, according to a recent survey by Norwich Union (NU), just £5,000 would make most of us feel pretty flush.

Anyone in line for a cash payout this summer as a result of the flotation of the likes of Scottish Life and Scottish Provident, among the many, will no doubt already be planning what to splash out on, or indeed invest in. But according to the NU study, most people said that if they received a substantial windfall they would use it to settle the mortgage.

The survey covered over 1000 internet users and found most people to be pretty optimistic about their financial future, despite the possibility of economic slowdown.

Two-thirds of Britons think that the current economic climate will not have a negative impact on their own financial situation.

If you are lucky enough to suddenly get a windfall - either through a demutualisation vote, a win on the lottery or as a gift, here are just some of your options for investment.

If you don't need the cash instantly to pay off debts, then a £5,000 lump sum put away now could reap high returns in the medium- to long-term.

Mini cash Isa

The best mini cash Isa rate is currently 6% (Smile internet account), and the real beauty is that it's tax free. The maximum you can invest in any tax year is £3,000, but if you invested this over five years at this rate you would end up with £4,014.68.

Remember though, these rates aren't fixed and they could go down as well as up over time.

If you choose to go for a cash Isa you can't have a maxi Isa in the same year. Check out the rules in our Isa Centre here

Deposit account

Although returns are comparatively low compared to other forms of investment, the advantage is that cash is safe and can be accessed at any time.

If you choose to invest your £5,000 in one of the top paying savings accounts - currently Bradford and Bingley's (B&B) Premier Saver with a rate of 4.50% gross, after five years you'd have £6230.91. But of course if you're a tax-payer this diminishes significantly.

Another problem is you can't guarantee the interest rate will stay at this level. All savers should be vigilant and be prepared to move their savings to different providers if the rate on their account falls. B&B has a guarantee that its rate on the Premier Saver will never be 1% below base rate.

With-profits funds

These are relatively safe, steady investments. The fund provides a return based on equity, bond and property investments. Returns are generally higher than you'd get from a deposit account or cash Isa, but lower than investing directly in the stock market.

Average returns are in the region of 7% net of basic rate tax. So £5,000 invested now would yield £7012.76 in five-year's time - if you didn't touch the capital.

Equity funds

Investing in the stock market through a fund - either a unit trust, investment trust or open-ended investment company (OEIC) - involves more risk than any of the options above - in that there is risk to your capital. The upside is that the potential for growth is also much higher.

IFAs say that those who want to put money in the stock market, either directly or indirectly through a fund or trust, should really consider it a medium- to long-term investment.

If you haven't already opened a mini cash Isa this tax year you could get a maxi Isa which will allow you to invest up to £7,000 tax-free in stocks and shares.

If you don't put your fund in an Isa wrapper you'll have the income tax and CGT implications to deal with.

It is best to get advice from an independent financial advisor before putting a lump sum into any kind of fund.

Venture Capital Trusts

If you're happy with a very high degree of risk and you've got £5,000 or more to invest you might want to consider putting it into a venture capital trust.

These funds invest in unquoted companies and the best thing is you get 20% tax relief on the investment, as long as you keep the cash in place for five years.

It might seem like a very risky idea and it's true - you could lose all your money if the companies you invest in flop. But you could put your money behind the next rising star.

To find out more about how VCTs work, the tax relief and the restrictions click on our VCT guide.

Check out all our savings calculators here

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