Best Short-Term Investments UK in 2024 (2024)

Short-term investing involves parking your money in accessible, lower-risk assets for relatively quick payoffs. While returns are modest, preserving your principal is the priority.

The best investments for short-term goals typically focus on liquidity and stability rather than maximising yields. You don’t want to risk losing your money when you need it soon.

I’ve rounded up some of the best short-term investments in the UK that investors may want to consider.

This article was reviewed byTobi Opeyemi Amure, an investing expert and writer atInvestopedia,Investing.com, and Trading.biz.

Table of Contents

1. High-Yield Savings Accounts

The simplest short-term investment is an online high-yield savings account. These pay substantially higher interest than brick-and-mortar banks while providing unlimited access to your cash.

Top high-yield savings accounts in the UK offer up to 6% AER interest currently. This provides a modest return on cash you may need within the next 1-2 years. Interest compounds daily and is paid monthly.

You can open a savings account online in minutes with no minimum deposit. Leading options include platforms like Marcus, Atom Bank, and Cynergy Bank. Just shop around for the best rates.

Pros:

  • FSCS equivalent insurance up to £85,000
  • No minimum deposit
  • Easy access with no withdrawal limits
  • Relatively competitive interest rates
  • Online banks offer better rates than physical banks

Cons:

  • Rates lower than investments with higher risk
  • Interest subject to income tax

High-yield savings accounts are ideal for short-term goals like emergency funds or a house down payment you expect to need within a year or two. You earn modest interest with no risk while keeping the cash accessible.

2. Short-Term Corporate Bond Funds

Bond funds holding short-term corporate bonds can generate modestly higher yields than savings accounts with only marginally higher risk. Short-duration bonds are less sensitive to rate hikes.

These bond funds invest in debt issued by corporations with high credit ratings and maturities between 1-3 years. By owning shares of many bonds, you achieve instant diversification.

Because bond funds trade daily, you can liquidate your shares within a few business days if needed. Minimum investments can be as low as £100.

Pros:

  • Low exposure to interest rate fluctuations
  • Higher yields than savings accounts
  • Professional fund management
  • Buy into many bonds at once
  • Can sell quickly if needed

Cons:

  • Subject to some price volatility
  • Low potential for capital gains

For slightly higher returns, short-term corporate bond funds carry modest risks. Diversified exposure reduces risk compared to owning individual bonds.

Investing directly in stocks can produce higher returns than interest accounts over a 1-3-year period. However, stocks carry higher volatility and risk of losses.

Focus on established, blue-chip companies with stable earnings. Choose companies in diverse sectors to mitigate individual stock risks. Index funds provide immediate diversification.

Stocks are highly liquid investments you can sell within a few seconds online. Gains under a certain amount per year can be realised tax-free in a Stocks and Shares ISA account.

Pros:

  • Higher return potential than cash or bonds
  • A wide range of companies and sectors
  • Can be sold immediately during market hours
  • Tax-free gains

Cons:

  • Higher volatility with risk of losses
  • Requires extensive research
  • Individual companies can go bankrupt
  • Not recommended for beginners

Stocks are appropriate for short-term investors comfortable with higher risk and volatility. Limit exposure and diversify broadly across market sectors.

See also: How to invest in stocks

4. Cash ISAs

A cash ISA allows depositing up to £20,000 each tax year while earning tax-free interest. Leading cash ISAs currently pay around 5% interest or higher.

Cash ISAs can be opened online with banks like Virgin Money, Barclays, and NatWest. You can withdraw cash anytime without tax implications. New money deposited each tax year keeps building your tax-free savings.

Pros:

  • Interest income is tax-free up to £20,000 per year
  • No tax on withdrawals
  • Keep depositing new money each tax year
  • Typically higher interest than normal savings
  • Easy access with no penalties

Cons:

  • Lower return potential than bonds or stocks
  • Each tax year’s allowance expires if not used
  • Interest rates fluctuate over time

Cash ISAs provide a tax-efficient way to earn a modest yield on short-term savings. The annual allowance can keep being recycled each year for more tax-free interest.

5. Money Market Funds

Money market funds invest in high-quality short-term debt securities such as government bonds, certificates of deposit, and commercial paper. The funds aim to maintain a stable £1 net asset value.

By owning shares in many short-term instruments, money market funds produce yields comparable to savings accounts with minimal risk.

Money market funds offer quick liquidity with no minimum investment amount. Leading providers include Fidelity and Vanguard.

Pros:

  • Yields in line with high-yield savings
  • No minimum investment
  • Very low-risk profile
  • Quick and easy access to your money
  • Free from income tax liability

Cons:

  • Yields are still lower than bonds
  • Not equivalent to bank deposits
  • Vulnerable to heavy redemptions

For short-term holdings, money market funds provide stability similar to cash while generating slightly higher yields. The liquidity and low minimums provide appeal.

6. Certificates of Deposit

Certificates of deposit (CDs) allow depositing money in a bank for a fixed duration to earn interest. Typical terms range from 3 months to 5 years. The rate is fixed for the term once deposited.

The bank pays higher interest for tying up your money. Penalties apply for early withdrawal. UK government protection covers up to £85,000 per depositor per institution.

Leading banks currently offer up to 5% interest on 1-year CDs. Minimum deposits start around £1,000. Interest is recognised as taxable income.

Pros:

  • Fixed interest rate for the term
  • Up to £85,000 protection per institution
  • No volatility or risk of losing money
  • Slightly higher yields than savings

Cons:

  • Penalty applying 3-6 months interest for early withdrawal
  • Locked in even if market rates rise
  • Limited liquidity during the fixed-term

CDs pay modestly better yields than savings in exchange for locking up your money. Consider laddering CDs so amounts mature in succession for better cash flow.

7. Cash Management Accounts

Brokerage cash management accounts combine features of bank accounts, money market funds, and cash ISAs for investors.

The accounts pay competitive interest while offering perks like debit cards, bill pay, and check writing.

Fidelity, IG, and other brokerages offer cash management accounts. Minimums to open an account start at £1,000 or £5,000 for some accounts.

Funds can be spent via debit card or withdrawn to your linked bank account within 1-2 days. Interest is recognised as taxable income.

Pros:

  • High yield compared to traditional bank accounts
  • Features like debit cards and online bill pay
  • Interest rates competitive with savings accounts
  • Easy access to your money

Cons:

  • Minimum account balances apply with some providers
  • Interest is taxed as income
  • Higher yields might not persist long term

Cash management accounts allow investors to earn a better yield on cash while accessing useful features. Just be aware of minimum balance requirements.

Choosing the Best Short-Term Investments in the UK

When selecting short-term investments, follow these guidelines:

  • Match Timeline: Align the duration of your investment to your goal timeframe. Don’t lock up money you’ll need in less than 12 months.
  • Prioritise Stability: With short timeframes, focus on preserving principal rather than maximising returns. Avoid unnecessary risks.
  • Consider Taxes: Interest and short-term capital gains are taxed as ordinary income. Make use of tax-advantaged accounts when suitable.
  • Watch Expenses: Look for options with low or no fees to maximise net returns on your money.
  • Diversify: Mitigate risk by allocating money across different institutions and asset classes.
  • Shop Around: Compare interest rates and terms across providers to find the best offers. A little effort can mean more yield.
  • Review Frequently: Adjust your holdings regularly to take advantage of rising interest rates or better opportunities.
  • Automate When Possible: Setting up direct deposit into accounts like high-yield savings can help consistently build your holdings over time.
  • Don’t Chase Returns: Unsafe reach for yield often backfires. Be content with modest stable returns over the short run.

Advantages & Disadvantages of Short-Term Investments

Investing in short-term assets can be a good strategy depending on your financial goals, risk tolerance, and investment timeline.

However, like any financial decision, it has its advantages and disadvantages.

While the specifics can vary depending on the type of short-term investment and prevailing market conditions, here are some general pros and cons that apply:

Advantages

  1. Liquidity: Short-term investments are generally more liquid than long-term investments, allowing you to convert your assets into cash quickly.
  2. Flexibility: You can easily shift your investment strategy to respond to market changes. If you find a better investment opportunity or need the cash for another purpose, you can often move your money without significant penalties or loss of value.
  3. Lower Risk Exposure: Because of the shorter time horizon, these investments are often less exposed to the long-term volatility of the market.
  4. Quick Returns: For those who know what they’re doing or get lucky, short-term investments can offer quick returns.
  5. Hedging Opportunities: Short-term investments can serve as a hedge against other, longer-term investments that may not be performing well.
  6. Diverse Portfolio: Short-term investments can help to diversify an investment portfolio that also includes longer-term assets.
  7. Tax Benefits: In the UK, some short-term investments like certain types of bonds are tax-efficient. However, tax laws are subject to change, and it’s advisable to consult with a tax advisor.

Disadvantages

  1. Higher Transaction Costs: Buying and selling securities frequently incur brokerage fees and other transaction costs that can eat into your profits.
  2. Increased Risk: Despite a lower long-term exposure, short-term investments can be volatile and susceptible to short-term market fluctuations. The potential for quick gains comes with the potential for quick losses.
  3. Tax Implications: Short-term capital gains are often taxed at a higher rate than long-term gains in many jurisdictions, including the UK. This can reduce the net return on your investments.
  4. No Dividends: Short-term investments typically don’t offer dividends, which are often a significant portion of the return on long-term investments like stocks.
  5. Missed Long-Term Growth: By focusing on short-term gains, you may miss out on the benefits of long-term investing, such as compound interest and potential appreciation over a longer period.

It’s essential to evaluate your financial situation, consult with a financial advisor, and consider the tax implications before deciding to engage in short-term investing.

Best Short-Term Investments UK – Final Thoughts

Finding the right short-term investments involves balancing modest returns with security and liquidity. Stick with reputable banks, brokers, and low-cost mutual funds.

For money you may need within a year, high-yield savings accounts offer easy access with FSCS-insured safety. Interest rates will be low but your focus is preservation.

Tax-free cash ISAs protect your interest income from taxes while providing liquidity. Locking up money in CDs for several months to a year provides slightly higher yields in exchange for reduced access.

Money market funds and short-term bond funds maximise returns a bit more while introducing minimal volatility.

Stocks can generate higher gains over a 1-3 year period but have significant risk of losses. Only invest money you won’t need short-term when investing in stocks.

Review your options frequently and adjust your holdings as interest rates and personal needs evolve. Don’t reach for unsustainable yields—prioritise stability for any money required in the next 3 years or less.

Note:

*This is not financial advice.

Investments can fluctuate in value, possibly leading to a return less than the initial amount invested. Historical outcomes don’t guarantee future results.

Pensions are investments for the long haul. Their worth might vary, potentially affecting the pension benefits you receive. The income from your pension could be influenced by prevailing interest rates when you claim your benefits.

The content in this article is informational. Refrain from making decisions solely based on this information. Our comprehension of HMRC rules, as presented here, may change.

FAQs

What is the safest investment with the highest return UK?

There is no investment that is simultaneously the “safest” and offers the “highest return,” as these two characteristics generally exist in a trade-off relationship. However, in the UK, government bonds, also known as Gilts, are often considered among the safest investments because they are backed by the British government. The trade-off is that they usually offer lower returns compared to riskier assets like stocks. On the other end of the spectrum, stocks potentially offer high returns but come with higher volatility. A balanced approach to optimising safety and returns often involves diversification—mixing various types of assets like bonds, stocks, and perhaps real estate. Always consult a financial advisor to tailor investments to your specific needs and risk tolerance.

Best short-term investment options with high returns?

Short-term investments with high returns often come with higher risks. Options like day trading in stocks, commodities, or Forex can offer significant returns within a short period, but they require expertise and are volatile. Peer-to-peer lending platforms or high-yield savings accounts may offer relatively higher interest rates than traditional savings accounts but come with their own risks and limitations. Another option is investing in short-term corporate bonds or ETFs that focus on such instruments. These can offer better returns than government bonds but also carry higher risks. It’s crucial to carefully evaluate your risk tolerance and investment objectives before diving into these high-return, short-term options. Always consider consulting a financial advisor for personalised advice.

Best short-term investment plans for 3 months?

For a 3-month investment horizon, options like money market accounts, certificates of deposit (CDs) with short maturity dates, or Treasury bills can be relatively safe choices but typically offer modest returns. If you’re willing to take on more risk for potentially higher returns, you might consider short-term corporate bonds or bond ETFs. Trading in stocks or commodities is another option but comes with significant volatility and risk, especially over such a short period. Diversifying across different types of short-term assets could help balance risks and returns. Before making any investment, it’s advisable to consult a financial advisor to ensure that your choices align with your financial goals and risk tolerance.

What to invest in the short term UK?

In the UK, short-term investment options range from low-risk choices like money market accounts and short-term government bonds (Gilts) to higher-risk, higher-reward options like individual stocks or commodities trading. If you’re comfortable with moderate risk, you could look into short-term corporate bonds or actively managed funds that focus on short-term gains. Peer-to-peer lending platforms can also offer attractive yields over a short period but come with their own set of risks. Exchange-traded funds (ETFs) focusing on sectors expected to perform well in the short term could be another avenue. Remember, higher potential returns usually come with higher risk, so it’s essential to align your choices with your risk tolerance and financial goals. Consult a financial advisor for personalised guidance.

You may also like:

  • Best investment apps UK
  • Best investment platforms UK
  • Best investments for beginners
  • Best long-term investments UK
  • Best low-risk investments UK

I'm an expert in personal finance and investment strategies, with a deep understanding of various financial instruments and markets. My knowledge is derived from extensive research, practical experience, and a continuous commitment to staying informed about the latest developments in the field.

Now, let's delve into the concepts presented in the article on short-term investments in the UK:

1. High-Yield Savings Accounts:

  • Definition: Online savings accounts offering higher interest rates than traditional banks.
  • Pros: FSCS equivalent insurance, no minimum deposit, easy access, competitive interest rates.
  • Cons: Rates lower than higher-risk investments, interest subject to income tax.

2. Short-Term Corporate Bond Funds:

  • Definition: Funds investing in short-term corporate bonds with modestly higher yields than savings accounts.
  • Pros: Low exposure to interest rate fluctuations, professional fund management, quick liquidity.
  • Cons: Subject to some price volatility, low potential for capital gains.

3. Cash ISAs:

  • Definition: Tax-free individual savings accounts with higher interest rates, allowing deposits up to £20,000 per tax year.
  • Pros: Tax-free interest, easy access, typically higher interest than normal savings.
  • Cons: Lower return potential than bonds or stocks, fluctuating interest rates.

4. Money Market Funds:

  • Definition: Funds investing in high-quality short-term debt securities for stable £1 net asset value.
  • Pros: Yields comparable to high-yield savings, very low-risk profile, quick liquidity.
  • Cons: Yields lower than bonds, not equivalent to bank deposits, vulnerable to heavy redemptions.

5. Certificates of Deposit (CDs):

  • Definition: Fixed-term deposits in banks with fixed interest rates and penalties for early withdrawal.
  • Pros: Fixed interest rate, up to £85,000 protection, no volatility.
  • Cons: Penalty for early withdrawal, limited liquidity during the fixed term.

6. Cash Management Accounts:

  • Definition: Brokerage accounts combining features of bank accounts, money market funds, and cash ISAs.
  • Pros: High yield, features like debit cards, competitive interest rates.
  • Cons: Minimum account balances, taxed interest as income, uncertain long-term yields.

Choosing the Best Short-Term Investments in the UK:

  • Guidelines: Match timeline to goals, prioritize stability, consider taxes, watch expenses, diversify, shop around, review frequently, automate when possible, and avoid chasing returns.

Advantages & Disadvantages of Short-Term Investments:

  • Advantages: Liquidity, flexibility, lower risk exposure, quick returns, hedging opportunities, diverse portfolio, potential tax benefits.
  • Disadvantages: Higher transaction costs, increased risk, tax implications, no dividends, missed long-term growth.

Final Thoughts:

  • Recommendations: Balance modest returns with security and liquidity, stick with reputable institutions, and review options frequently.

FAQs:

  • Safest Investment with Highest Return: Government bonds (Gilts) are considered safe, but returns are generally lower.
  • Short-Term Investment Options: Money market accounts, CDs, short-term corporate bonds, diversified portfolios.
  • Best Investment Plans for 3 Months: Money market accounts, short-term CDs, Treasury bills.
  • Short-Term Investments in the UK: Range from low-risk choices to higher-risk options, including stocks and bonds.

This comprehensive overview should provide a solid understanding of the concepts discussed in the article on short-term investments in the UK.

Best Short-Term Investments UK in 2024 (2024)

References

Top Articles
Latest Posts
Article information

Author: Edmund Hettinger DC

Last Updated:

Views: 6711

Rating: 4.8 / 5 (78 voted)

Reviews: 85% of readers found this page helpful

Author information

Name: Edmund Hettinger DC

Birthday: 1994-08-17

Address: 2033 Gerhold Pine, Port Jocelyn, VA 12101-5654

Phone: +8524399971620

Job: Central Manufacturing Supervisor

Hobby: Jogging, Metalworking, Tai chi, Shopping, Puzzles, Rock climbing, Crocheting

Introduction: My name is Edmund Hettinger DC, I am a adventurous, colorful, gifted, determined, precious, open, colorful person who loves writing and wants to share my knowledge and understanding with you.