Lump sum savings

Receiving a lump sum of cash - whether it’s from a bonus, house sale, inheritance, or simply business income - can be exciting, but also overwhelming. On this page, we’ll define ‘lump sum payment’ and look at some options you could consider if you’re not sure what to do with a large sum of money you’ve received.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

A lump sum is a single, one-off payment of money, as opposed to a series of smaller payments made over a period of time. You can receive a lump sum of cash or you can make a lump sum payment – for example, if you buy a house outright rather than with a mortgage. 

Some examples of lump sum payments include:

• A redundancy package

• An inheritance received by a beneficiary

• Compensation or a legal payout

• A bonus from your employer (for example, a signing or performance bonus)

• A flat fee for a completed project as a contractor or freelancer

• Winning the lottery

A lump sum refers to the method of payment, not the amount itself. However, in general, when people refer to a lump sum payment, they’re often talking about a large amount of money.

What is considered a large sum of money in the UK is relative, as it’s dependent on your financial situation, current income level, and where you live. Let’s look at some general benchmarks:

• £5,000 - £10,000: Generally significant for personal expenses or lump sum savings 

• £25,000 - £50,000: Considered a life-changing amount for many UK households

• £100,000+: Typically seen as a serious investment, inheritance, or property deposit

• £1 million: Mostly regarded as a large, life-changing sum

For most people, if the lump sum payment is enough to clear debt, buy a home, or significantly alter certain life choices, it would be considered a large sum of money.

Now you know the meaning of a lump sum payment, what are your options if you’ve received one? The best options for a lump sum of cash depend on the amount you’ve received, your current financial situation, and your goals and future plans. It’s important to take the time to weigh up your options, and you may wish to speak with an independent financial adviser, especially if income tax is due or there are implications for any benefits you receive.  

Here are some common actions people take after receiving a lump sum:

For those with credit cards, payday loans, or other high-interest debt, some financial experts suggest using a lump sum payment to pay these off first. Along with setting some money aside for unexpected expenses, paying off your debts can give you peace of mind and reduce stress.

It is generally recommended to have three to six months of living expenses set aside to protect you in the case of unexpected financial costs – for example, if you lost your job or your car broke down. By keeping your emergency fund in a basic  savings account, or one with instant access, you can withdraw your funds when you need them – as suggested by StepChange Debt Charity. An easy access savings account is another option that earns interest on savings, but some restrictions may apply on the amounts you can withdraw, so it is important to check the account details.

If you’ve cleared your debts and built your emergency fund, you could consider saving or investing your lump sum payment to increase the balance even further. Some financial professionals suggest using a savings account for funds you think you’ll need in the next two years or so. You could think about:

• Fixed rate bonds or lump sum savings accounts, where you’ll lock your money away for a set period, but earn a guaranteed (and usually higher than an easy access savings account) rate of interest.

• Notice accounts, which offer a variable rate of interest with medium flexibility to access your money – you’ll just need to give notice when you want to close your account (usually between 30 and 120 days).

• ISAs, which are a tax-free savings or investment account, into which you can save up to a maximum allowance of £20,000 per tax year.

If you're comfortable taking on some risk and are happy to put funds away for the long term, you could consider investing your lump sum. Options such as property, REITs, stocks and shares, or even hedge funds offer the potential for higher returns than a savings account, but they also come with a high level of risk, and returns are not guaranteed. Be aware that investments can go down as well as up, so you should only invest what you can afford to potentially lose or leave untouched for the long term. If you are still working, one option suggested by experts is to prepare for retirement by investing some of your lump sum savings into your pension.

Some people might choose to enjoy their lump sum,  perhaps by spending money on a holiday or making some home improvements. Setting a personal limit on this spending can help ensure the lump sum also provides longer-term value.

When it comes to how to manage a lump sum of money, keeping it secure and protected is essential. It’s generally wise to avoid holding large amounts of physical cash, as it could be at risk of theft and may lose value over time due to inflation.

Depending on how big your lump sum is, one option is a  savings account from an FSCS-protected bank or building society. This offers the security that, if the institution fails or is unable to meet its financial obligations, the FSCS can provide compensation for eligible customer deposits up to a limit of £85,000 per person, per bank.

It also gives you the chance to earn interest on your money, especially if you haven’t yet decided what to do with your lump sum of money in the long term. 

If you opt for a savings account, you might consider:

• Deposit protection: UK-regulated banks protect your money up to £85,000 per person and bank. Therefore, if your lump sum savings exceed this amount, you might consider spreading them out across multiple banks. Keep in mind that the £85,000 FSCS protection limit applies to all funds held with a bank, so you may want to consider if you hold any other funds with the provider before choosing an account.

• Interest rates: Take time to compare savings accounts from different banks and building societies to find the highest rates. Fixed rates ensure you’ll know exactly how much interest you’ll earn over a set period, while variable rates could go up or down at any time.

• Access to your savings: The highest interest rates are sometimes offered by savings accounts with longer terms, such as one year or more. If you’d prefer flexible access to your lump sum savings, you could choose an easy access or instant-access account instead (although interest rates may be lower).

Looking for somewhere to put a large sum of money while maximising interest? With Raisin UK, you can access savings accounts with rates up to 4.35% AER. Our easy-to-use marketplace makes it easy to browse, apply for, and manage all your deposit-protected savings accounts under one roof. Register today and start earning interest on your savings.