Lump sum savings guide
Lump sum savings refer to depositing a large amount of money all at once, rather than in smaller, recurring instalments.
Lump sums can play a key role in financial planning, whether you’re saving for retirement, managing your budget, or pursuing a specific financial goal.
If you receive a lump sum payment, it’s important to take the time to carefully decide what to do with it. In this article, we’ll explore what a lump sum is and ideas for how you could use a lump sum.
In this guide:
What can I do with a lump sum?
What is a lump sum?
A lump sum is a one-time payment made in full rather than through multiple, smaller instalments. It is a single, large payment given for a specific purpose, and once received, no further payments are expected for that particular transaction.
The key difference between a lump sum and recurring payments lies in the payment structure. Recurring payments involve ongoing, periodic payments (for example, monthly, weekly, or annually), such as rent or salary. In contrast, a lump sum is paid all at once, and there are no further obligations unless another lump sum is agreed upon later.
Examples of a lump sum include:
- proceeds from selling your house
- inheritance, which is money received from the estate of someone who has passed away
- a bonus awarded by an employer as extra pay
- tax refunds issued by the government when you’ve overpaid taxes
- retirement pay-out, provided from a pension upon retiring.
What can I do with a lump sum?
There is no one-size-fits-all approach when it comes to what you should do with a lump sum when you receive one. If you happen upon a large amount of money all at once, there are several options you can consider, depending on your financial goals or current situation. It’s important to think carefully about what you do with your money if you receive a lump sum. Below, we’ve gone into some options for what you can do with your lump.
Putting lump sums into a savings account
Lump sums can be placed into a savings account to earn interest over time. Here at The Co-operative Bank, there are various savings accounts options suited for lump sum deposits.
Fixed rate savings accounts
Fixed rate savings accounts are an option if you are looking to save a lump sum of money that you will not need to access for a fixed period of time. With these accounts, you lock your money away for a specific period at a fixed interest rate that is typically higher than the rate you would get from an account that allows instant access.
Instant access savings accounts
Instant access savings accounts offer more flexibility than a fixed rate savings account, as you are able to make regular withdrawals. However, you’ll typically receive a lower rate of interest than fixed rate accounts.
These accounts are an option if you want to save a lump sum but want to be able to access your funds for withdrawals if needed. For example, if you need to pay for something last minute, like a vet bill, a car repair or even a last minute holiday.
At The Co-operative Bank, our Base Rate Tracker offers a range of interest rates depending on your account balance, so saving a larger lump sum can help you earn more interest.
Cash ISAs
Cash ISAs allow you to deposit up to £20,000 per tax year, and any interest you earn is completely free from tax. Cash ISAs can be either instant access or fixed rate.
Repaying debts
A lump sum could be used for repaying debts, such as credit card balances or loans. Using a lump sum to pay debt can help reduce the overall interest you pay on your debt.
Putting it into a bank account
You could keep your lump sum in your bank account. However, keep in mind that the money is unlikely to earn interest in this type of account. Consider putting your lump sum into an instant access savings account. This way, you can still withdraw money when needed, while earning interest on your savings.
Overpaying your mortgage
You can use a lump sum to overpay your mortgage, provided your mortgage lender allows overpayments. While this might not change your monthly payments, it can significantly reduce the total amount of interest you pay and help you pay off the mortgage faster. Mortgage overpayments can shorten the term of your mortgage, saving you money over time.
Creating an emergency fund
You can set aside a lump sum to create an emergency fund, which can provide a financial safety net for unexpected situations, such as a car or appliance breakdown, surprise bills, or even job loss.
Having this backup can help you avoid going into debt when life’s unanticipated events happen. For an emergency fund, you’d typically want to keep your money in an account that offers easy access while still earning some interest, such as an instant access savings account.
Large purchase
A lump sum can be used to make a big purchase, such as a car, house, or holiday. By using a lump sum, you can avoid taking on debt or paying interest on loans, allowing you to make the purchase outright.
Pros and cons of saving a lump sum
There are various positives and negatives of saving a lump sum of money. Here we have laid out what they are. Choosing the right strategy for your lump sum depends on your financial goals and risk tolerance.
Pros
Saving a lump sum in a savings account offers several benefits. Firstly, it allows you to earn interest, helping your money grow over time. Instant access savings accounts provide flexibility, enabling you to withdraw your funds whenever needed, making them ideal for emergencies or future expenses.
Fixed-rate savings accounts guarantee a fixed return on your deposit, ensuring predictable growth.
Your savings, up to £85,000, are also protected by the Financial Services Compensation Scheme.
Read further information on the how FSCS protects your money (PDF) or by visiting the FSCS website.
Cons
Using a lump sum wisely requires careful consideration of the options. Paying off high-interest debt can be a more cost-effective than saving if the money you will save in interest payments is higher than the interest you would earn on your savings balance.
Making your decision
Deciding what to do with a lump sum depends on your individual circumstances, such as your need for access to the money, the size of the lump sum, and the interest rates available. Whether you choose to save, invest, or pay off debt, it's important to consider your financial goals and priorities.
The decision on what do with a lump sum is ultimately your decision. If you are unsure, you should seek independent financial advice.
To get an idea of how much interest you could earn from putting your lump sum into a savings account, try using our savings interest calculator.
Not found what you're looking for?
Contact our support team