How to invest £1 million

What do you want your £1m to achieve?

Getting the best return on your £1m shouldn’t be your top priority. Whether you have £1,000 or £1m to invest, the starting point should always be what you want to achieve with your money.

There are no right or wrong answers. What’s right for you will ultimately depend on your age, needs and circumstances. Younger investors might want to really grow their wealth and invest for growth, older investors may want to generate an income from their £1m investment.

With such a large sum, many investors will simply want to focus on preserving the value of their £1m, while others will be tempted to consider something more speculative with at least some of their money.

Thinking these things through will give you a clearer idea of where you invest.

Your £1m investment portfolio

Whatever your goals, it makes sense to invest your £1m across a number of different investments and asset classes. Not putting all your eggs in one basket reduces risk – ensuring that one poor investment doesn’t drag your whole portfolio down with it.

This is particularly important if you are contemplating putting some of your money into higher-risk investments.

A diversified portfolio will normally contain cash, fixed interest and stocks and shares. But with £1m to invest you might want to consider other asset classes too.

Cash

Savings accounts might not be terribly exciting, but they are a crucial part of your investment strategy. Start by ensuring you have three to six months money for emergencies in an instant access account. But, in addition to that, you also need to make sure that you have cash on hand for other big expenses you’ll have over the next few years. With a windfall like £1m, you’ll likely want to spend some of it, so think about how much cash you will need for holidays, cars, helping family and so on.

You might want to pay off your mortgage too. However, it doesn’t make sense keeping money that’s not needed in the short to medium term in cash accounts. That’s because over the years, its spending power is likely to be eroded by inflation. So, even if your priority is capital preservation, it still makes sense to consider assets that will achieve a higher rate of return than cash.

Fixed interest

Fixed-interest securities are loans to businesses (corporate bonds) or governments (gilts or government bonds) which pay investors a fixed rate of return. In terms of risk, bonds are often considered a halfway house between cash and stocks and shares. However, there’s still a broad spread of risk within the asset class. The higher the yield on the bond, the greater the risk of the borrower defaulting on the loan. It’s possible to buy corporate bonds and gilts individually but you can achieve greater diversification by investing in a fund that offers access to a wider portfolio of bonds.

Stocks and shares

When you buy shares you are buying a stake in a company that is listed on a stock exchange. That means your returns are dependent on the performance of the company you’re invested in, and the value of your investment could fall. However, money invested in the stock market is likely to grow faster than cash over time – the key is to think long-term and not invest in money you’ll need for five years, at least. The longer you invest for, the more time you have to ride out short-term volatility and reap the benefits of compound returns.

This is when the money your investment makes starts working for you and earns a return too. It might not sound much but as the years pass it becomes a significant driver of growth. Again you can buy individual shares, but it’s lower risk and easier to diversify your portfolio by investing in a fund or other collective investment that offers access to a basket of shares. 

Property

With the potential to deliver income and capital growth, property can be a useful way of diversifying your holdings. However, while you might have the money for it, residential property isn’t the easiest asset class to invest in. Property is expensive to manage and increasing taxes are making it hard for amateur landlords to make money. Commercial property (think retail units, warehouses or offices) can be easier to access through funds and investment trusts.

Commodities

This is an investment in a natural resource – that’s anything that can be mined, grown or processed. Although there’s a wide choice of commodities to invest in, the most popular is gold. This is because it tends to hold its value well, making it a strong defensive play and a useful hedge against inflation. It’s possible to buy commodities directly (for example gold bullion) but it’s normally more straightforward to invest in a commodities index with an exchange-traded commodity (ETC) or with a fund that buys commodities.

Alternative investments

With £1m to invest you might also want to consider alternative investments too. This could be anything from art, antiques and jewellery to vintage cars and wine. Investment performance isn’t guaranteed though, so it’s important to only invest in something you love and will be able to enjoy. You’ll also need to think about how you’ll store, maintain and insure your investment.

How you allocate your money across the different asset classes will depend on what you want to achieve and the level of risk you are prepared to take.

Investing £1m tax-effectively

In addition to thinking about where you invest £1m, you’ll also have to think about tax and structure your portfolio in a way that reduces the amount you pay on your portfolio.

There are plenty of allowances that can reduce your tax bill as well as wrappers that can shelter your wealth from tax.

You might not be able to safeguard your entire portfolio but, with a bit of planning, it will be possible to shave thousands off your tax bill and protect your wealth for future generations.

Pay less tax on your portfolio with the following tips:

• Use your ISA allowance: You won’t have to pay any tax on money held in an ISA and you can access your money whenever you wish. The catch for a £1m investor is that you can only pay in £20,000 each year. However, there are steps you can take to shelter more of your money in ISAs.  Couples, for example, can double that by using each of their allowances. Over the years you can also take advantage of Bed and ISA rules to sell investments in a trading account and immediately rebuy them in your ISA. You just need to take care not to trigger a capital gain that could be subject tax.
• Max out your SIPP: Money invested in pensions will be sheltered from tax as it grows and 25% can be taken tax-free (up to a maximum of £268,275). However, the biggest draw is tax relief on contributions, equivalent to the rate of income tax you pay which will give your investment a significant boost. The downside is that you can’t access your pension until you turn 55 (rising to 57 in 2028).  Each year you can invest 100% of your income (up to £60,000) in your pension, but again married couples might consider using both their allowances.  Carry forward rules may also let you pay in any unused allowance from the previous three years (you just need to make sure that your earnings in the current tax year are at least the amount that you are contributing), while Bed and SIPP rules allow you to gradually shift money over from a trading account into your SIPP.
• Use your CGT allowance: Reductions to the annual exempt amount for CGT (down from £12,300 to £6,000 in April 2023 and again to £3,000 in April 2024) are making it harder to avoid CGT. However, if you have a liability on the horizon there’s still action you can take to reduce your bill. Selling investments up to the value of the allowance is a good starting point – you can’t reinvest in the same investments straight away but you could always go for an equivalent fund or share.  If you’re married you can also make use of both sets of allowances as transfers between spouses are tax free. Where CGT can’t be avoided you can reduce the rate you pay by transferring it to a spouse, if they pay a lower rate of tax than you.
• Consider VCTs: If you’ve got an aggressive attitude to risk – and have exhausted shelters like pensions and ISAs – you might want to consider another investment with generous tax breaks: venture capital trusts. To encourage investment into very small businesses, VCTs offer 30% tax relief on contributions up to £200,00 as well as tax-free dividends, so long as you hold onto your investment for five years. The chance of small business failure is pretty high though, so it’s not a decision to take lightly.

Do I need advice to invest £1m?

To invest £1m sensibly and tax-effectively, you’ll have to make a lot of decisions about where and how you invest your money. You’ll also need to regularly review your investments and take regular action to maximise its tax-efficiency.

So, while you don’t need to take advice, it could be beneficial, especially if you are new to investing or don’t have experience managing a large portfolio.

In addition to putting together a financial plan that works for you, an IFA will also be able to help you with issues like inheritance tax and other areas of estate planning.