How can you generate income from a lump sum?

Many of us will be in line for a cash lump sum at least once in life. A pension pot or an inheritance, or the sale of a property could all mean sudden influx of cash.

There is the obvious temptation to spend it, but there could be better ways to enjoy your windfall. You could for example, invest it to potentially grow in value – or you could look at ways to make it provide you with an income.

At Continuum we are looking at some of the ways to generate an income from a lump sum.

Making money from money

There are of course many ways to make money from money. Some might not provide the levels of returns you want, others might present too much risk for you to feel comfortable. 

Cash savings

Cash savings are safe and predictable. You can plan ahead with a predictable interest rate, and the security of the Financial Services Compensation Scheme, or FSCS.

This would protect your savings up to £85,000 if an authorised financial services firms failed.

But there is more to saving than simply checking out the best interest rates. There are several types of savings accounts to consider.

  • Instant and easy access accounts are ideal for your emergency savings – you can take out your money instantly if you need it. Interest rates will, however, be relatively low.
  • Regular savings accounts let you save a set amount of your monthly income, and you can make the transfer automatic from your current account just after you are paid. There are restrictions on how much you can put in and take out, but you get a higher interest rate than with an instant account.
  • Fixed-term deposit accounts are for putting money aside for a set length of time. A fixed rate of interest is set in advance, so you know exactly how much you’ll end up with and when. In return for locking money away, you can expect a better interest rate.
  • Cash ISAs are also a type of savings account that offer tax-efficient interest. The interest rate on cash ISAs  can be similar to other types of savings accounts, but they have the advantage of keeping the interest your money earns safe from the taxman.

A rental property used to be a way to generate income and may still do so. However you may need to find the right property that is in good condition and you don’t have to spend too much on it before you can rent it out to tenants – but the latest rules and tax regulations may make it all but impossible to make a profit, especially if you need a mortgage as well as your cash investment.

Investing in the stock market 

If you are comfortable with the risk, investing in stocks or shares can potentially build capital or generate income. You could buy shares in a company that you think will do well, or you could invest in a fund that tracks a particular market index. Investing in single company shares carries an increased level of risk if the company fails you would lose your investment, such investments usually have to be arranged via a stockbroker or Bank.

Returns reflect the level of risk you are prepared to take, but our expert team of advisers will guide you through the whole process as you take a step into the investment world.

For example, when you buy a bond, you are lending money to the issuer, who promises to repay you with interest on a regular basis. The higher the risk – the higher the returns can be, but you may prefer the security of a UK government bond, or Gilt, usually these types of investments are bought via a stockbroker or Bank.

Or alternatively, Investing in a fixed-income fund that invests in bonds or other fixed-income assets may be a consideration. Fixed-income funds are generally considered to be less risky than stocks or shares, and they can offer the potential to generate a good income stream.

What’s right for you?

The investment income you could get will depend on a number of factors, including your risk tolerance, investment goals, and the current market conditions. There are other solutions to consider as well as other challenges such as tax, the levels and relief from taxation depends on individual circumstances, which  may be subject to future change.

Naturally, at Continuum we will be happy to provide the expert advice you need to make the most of your cash lump sum – or even how you can build a cash lump sum if you don’t already have one.

The Financial Conduct Authority does not regulate taxation advice, deposit accounts and UK Government Securities

Equity investments do not afford the same capital security as deposit accounts.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments and income from them is not guaranteed and can fall as well as rise and you may get back less than you invested.

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