This week our reader has a sum to invest. Carl Lamb of Smith & Pinching advises on how best to use it.

Reader question:

I have a small inheritance to invest – just £35,000 – and am wondering whether to put it into an ISA or just a normal bank or building society savings account, as I wouldn’t have to pay tax on any interest on such a small amount.

I don’t think I want to put it into stocks and shares as I’m nervous about the dangers of losing my money with that type of investment. I do want to add to it over time, however, whenever I have money left over from my earnings.

What do you suggest?

MORE: Personal Finance: How do I move ISA funds between people?

Smith & Pinching response:

There are a number of points to make here.

Firstly, you are right that you are allowed to receive bank or building society interest (or interest on other cash investments such as NS&I bonds) of up to £1,000 per year free of tax, if you are a basic rate taxpayer. This means that the tax-protected environment of a Cash ISA doesn’t bring you additional benefit in the short term. However, as long as your savings remain in an ISA, you will never pay tax on your interest, even if the total invested ends up bringing in more than the Personal Savings Allowance each year.

The potential issue with cash savings in general – whether inside or outside an ISA – is that, with current interest rates, they struggle to keep pace with inflation and so lose value in real terms.

Although investments containing stocks and shares do entail inherent investment risk, it is possible to manage that risk to keep it within boundaries that are comfortable for you. This can be kept tax efficient and has the potential to outperform cash savings, although you are absolutely right that gains cannot be guaranteed.

You can use your annual ISA allowance – currently £20,000 – to invest in a mix of Cash and Stocks and Shares ISAs in the same tax year: this means that you may need to spread your investment over two years, if you opt for an ISA framework.

There are other tax-efficient investment options which you might like to consider, such as saving into a pension provided you are happy to leave your money invested at least until you reach the minimum retirement age, currently age 55.

I strongly recommend that you speak with an independent financial adviser to set up a savings and investments strategy for both this inheritance and ongoing investment of any surplus income. The adviser will discuss your investment aims and objectives with you and will ensure that your strategy is suitable for you in terms of the amount of investment risk you are taking.

Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.