What will you do with your lump sum pay out?

Have you received a lump sum payment recently? It could be a pension lump sum, a lump sum payout from work or you may even have been lucky enough to have won a lottery lump sum!

Whatever your situation, if you have a lump sum to invest, there are countless lump sum investment options available. The most important thing however, is that you do something with it because doing nothing, or just leaving it in cash, will mean your money is likely to be eroded by inflation over the longer term.

The risks of not doing anything with your lump sum payment

With inflation at such a low, it appears an interest rate rise will most probably remain on the horizon for some time to come. While this is great news for variable rate mortgage holders, and borrowers in general, it’s not so great for savers.

Of course, it all depends on your circumstances but keeping large lump sums of money in cash over the long term may not be a good idea. If you need access to your money, that’s a different matter, but if you don’t need your lump sum pay out in the near term, doing nothing could mean it’s losing value.

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Inflation and your lump sum payment

It’s worth understanding a bit about interest rates and inflation, and the relationship between the two.

Inflation is a rise in the general price of goods. It means the same things will cost more in the future and this means your money loses value over time. It’s happening constantly and even quite small numbers can make a big difference over longer time periods. The only way to protect your money against inflation is to invest in assets that go up in value after you buy them. (at least as much as the rate of inflation)

However, because no one can guarantee that investments will always go up in value – they can and often do go down in value too – you need to get a good mix of different investments and hold them for as long as possible to give yourself the best chance of beating inflation.

And what about interest rates?

The base interest rate is set by the Bank of England and can be used as a tool to drive and control inflation.  Low interest rates encourage more borrowing, because it makes borrowing cheaper.  Greater borrowing can be good for the economy as it encourages more spending and a greater demand for goods and services. But, this higher demand generally leads to an increase in prices of goods and services i.e. inflation.  And it is inflation that can erode the value of your lump sum payment over time.

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What does this mean for people holding a lump sum?

While interest rates remain low, there will continue to be a disincentive to save.  Most interest paid by product providers is linked to the base rate, so until the base rate rises, interest rates are unlikely to move upwards. Cash ISAs and current accounts can often seem like a safe, hassle free haven for savings but in the current interest rate environment, there is the potential for higher growth elsewhere.

An investment portfolio built for you

Put simply, investing doesn’t have to be complicated and it should be available to everyone.  Wealth Horizon is the simple way for everyone to invest. We offer affordable financial advice, a simple online process and an investment portfolio built and managed for you.

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Any news and/or views expressed within this article are intended as general information only and should not be viewed as a form of personal recommendation. This article is not directed to, or intended for distribution or use in, any jurisdiction where such distribution would be prohibited. To the extent permitted by law, Wealth Horizon accepts no duty of care or liability for loss occasioned to any person acting or refraining from acting as a result of any material contained within this article. Where past performance is shown, this should not be taken as a guide to future returns. Investment in the stock market is not a suitable place for short term money. The value of investments and associated income may go down as well as up and you may not get back the full amount invested.

 

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