My relative has about £20,000 to invest - what should they do?
07 January 2022
Question by Sara
My relative has about £20,000 to invest. They would want a product that can be locked for up to 5 years but is very low risk and requires no financial expertise.
Answered by Allie Llewellyn
Thank you for your question.
With a timeframe of under 5 years and a very low risk appetite, I would suggest sticking to cash-based products. Whilst the returns your relative will receive on the investment will be more limited, an investment under 5 years is less likely to provide enough time to ride out the ups and downs that can be experienced with stocks and shares. This is especially important if there is a specific objective for the funds within the 5-year timeframe.
There are a number of different structures available which will allow your relative to invest in cash-based products. However, based on the amount available to invest an ISA could be a suitable option as your relative will have an ISA allowance of £20,000 in the 2021/22 tax year. (Depending on your relative's age it might also be worth considering a Lifetime ISA). Please note the ISA allowance is the total limit across all ISAs therefore if your relative has contributed to an ISA or opened a new ISA in the current tax year this option may not be available.
Whatever the structure your relative decides to invest through, the level of access your relative has to the investment will impact the interest rate that could be available. The options are broadly as follows:
• Instant Access - This type of account will allow your relative to withdraw money whenever they need it. These accounts can also usually be topped up whenever additional funds become available. Sometimes you are able to benefit from preferential rates for an initial term, however, these accounts often apply a variable interest rate which can be low.
• Notice Account – This type of account requires you to provide notice to the savings provider in advance of a withdrawal. These types of account often offer a slightly higher interest rate than instant access account however if you make a withdrawal within the notice period (i.e. 90 days) you will be charged a penalty.
• Fixed Term – This type of account requires you to commit the investment for a set term, usually between one to seven years. You will receive a fixed rate of interest over the term, which is often higher the longer you commit. However, it is important to remember that if interest rates increase during this period you will not be able to access the funds to move them to a higher interest account without paying a penalty.
Make sure you compare the rates available for each type of account before making a decision. Whilst fixed-term accounts usually pay higher returns, this isn’t always the case.
Please note that I have not provided details on all of the options available, including using a pension or bond structure which could provide additional tax advantages to you relative depending on their circumstances and objectives. I would strongly suggest that your relative arranges to meet with an financial adviser to discuss the most suitable strategy for this investment based on their personal circumstances and objectives.
I hope this provides you with some guidance.
All the best.
Allie is an Independent Financial Planner at Mazars LLP, based in the Birmingham Office, advising individuals and business owners. She works with her clients to deliver bespoke holistic financial planning advice to help them achieve their personal and financial goals throughout the different stages of life.