Unexpected £500k Inheritance

atush

I agree you dont 'Need' an IFA for a pension, but was thinking he was going to see one anyway.

Point is, as a taxpayer he needs to have a pension for retirement and tax planning. With interst on 500K they could easily be pushed into the higher tax braket w/o one.

jamesd

jgd12345 wrote: »

Thanks guys, i currently earn £27k a year so i'm a basic tax payer. I think i'll speak to an IFA but my general plan seems like the way forward.

Definitely do that. Investing £500,000 even half decently should be able to generate you an income of £25,000 or so, increasing with inflation, for life. Or a very cautious one of £20,000.

That income as a percentage is at a higher rate than current mortgage rates so it doesn't really make sense to be mortgage free when you can pay the mortgage and still be ahead. We also happen to be at a pretty good time for making new investments at the moment, with lots of major stock markets 20-25% down on last year, something that provides a good long-term outlook.

Note that an income-producing mixture of investments wouldn't be all in stocks, maybe only half of it. The rest would be in things like corporate bond funds (bonds issued by companies) and a range of other things.

When talking with an IFA do try to indicate that you'll take bad year drops in capital value of 20% or so, because you need to accept that to get maximum return on the investments. You can specify less and even 10% is sufficient, but it will decrease the prudent income level.

The income would initially make you a higher rate tax payer if you took it but an IFA can explain about tax wrappers like ISAs and pensions that can help to reduce that. Possibly also some use of an investment bond because up to 5% a year can be taken out for 20 years with no tax to pay on it. Venture capital trust use for 5% or so of it may also be good, in part because income from those is tax free with no capital gains tax to pay and 30% tax relief.

Do discuss the proposed charges and investment advice you receive here. We can let you know if it looks reasonable on price and general guidance.

If you want to clear a mortgage I suggest waiting five years or so and doing it gradually out of any investment capital growth that's above inflation. Then you'll be clearing but also getting the benefit of the investments. Or do it at a higher rate if the markets happen to be in a boom at the time, creaming off some of the profit from the higher prices.

If you're fairly close to being 55 years old a pension can be a good way to clear a mortgage, doing it with the 25% lump sum on which you've received tax relief. It's potentially a very good option for any of your income that would end up in the higher rate tax band.

For the mortgage you might consider remortgaging to an offset mortgage and putting the current mortgage balance into the offset account so you pay no mortgage interest. First Direct tends to do quite competitive ones, I think with a low fee at the moment, and they are flexible enough to deal with situations like yours where there's a lot of capital to generate income. This money can then be used as a deposit on your new place or it can be kept as the cash part of your investment mixture.

oldvicar

IMHO jamesd has just given the sort of opinion I expect some IFAs would give, albeit without the benefit of a fact-find.

It scares me witless !

jamesd

oldvicar wrote: »

It scares me witless !

It's easy for people to think of not having a mortgage but the really fun thing is to realise you can both have the property and the income for life and how to achieve it... A decent IFA should have no trouble at all arranging for the money to do both, leaving jgd12345 set up for life and not having to worry any more about what redundancy or serious illness might do to their lifestyle.

IronWolf

In all honesty, if I was you I'd move my job to part time. Then I'd pay off the mortgage, and invest the other £400k, taking a few months to research how to start investing (if i didnt know already).

scottish_stresshead

dont be tarring IFAs with the same brush purely becaue people make assumptions that they are all greedy so and so's out for everyone's money

i work for a IFA company with just 2 directors and myself....the directors are made to sign things to say they have chosen the product for the client that is right for them and their circumstances rather than it being highest in commission etc ...there are loads of paper work they need to fill in for each client and some times they dont even charge..they just wnat to help people out by giving them good advice!!! they are checked up on regulary to make sure they are making the decisions taking into account the clients best interests etc

:money:

Jimmbron

If you do decide to invest, I wouldn't do so all at once. Markets are volatile right now - if you get the timing wrong, you could lose. Better that you move your chosen amount into investments over a few instalments to mitigate this risk. A bad IFA might advise differently, so they can lock in the commission ASAP! As people have pointed out though, there are some very good IFAs out there. Look for one who is fee-based, not commission-based, and who ideally is both a Chartered Financial Planner and Certified Financial Planner.

Ifts

jamesd wrote: »

It's easy for people to think of not having a mortgage but the really fun thing is to realise you can both have the property and the income for life and how to achieve it...

The reason I posted what I did in my post above was because the OP said:

jgd12345 wrote: »

I'd really appreciate the help as dealing with this sort of money is completely new to me.

So I was thinking along the lines of keeping it simple for the OP as they are not used to this sort of money and investing it in the wrong products could be very costly. Sometimes its better not to over complicate things and going into investments that you don't understand.

As the OP is earning £27k a year any income from the £500k would almost certainly push them into the higher rate tax bracket, although tax wrappers can be used to off set this but doing so will make it more complicated for the OP.

There are no guarantees going down the investment route, and in the future the OP could easily be nursing losses on their investments and hoping they had paid off their mortgage when they had the funds to do so.

The 1st property if retained could provide the OP with an income and if they did go and pay £250k cash for their new home they would still have £165K to invest. And going forward not having no mortgage, the OP could if they wish invest any surplus income they have on a monthly basis.

I understand there is no one size fits all here, but for peace of mind and keeping it simple for the OP paying off the mortgage would be an option, also by doing this the OP would have less reliance on an IFA advising them in their best interests.

jamesd

It's really the job of the IFA to fully understand and explain to their customer. The IFA also is on the hook with a requirement to pay for any losses caused by giving wrong advice, so there's pretty good protection. Part of the shopping around for an IFA is finding one who does this explaining well.

I agree that if jgd12345 wants to become a property manager keeping the first property and letting it out is an option, though I'd do it with a mortgage because that's cheaper than tying up the capital. I think that's actually quite a good idea, with a mortgage, if the hassles from tenants and having to fill out a tax return every year are acceptable. Without a mortgage it's not a very efficient use of money and would needlessly reduce income levels while tying up lots of money.

The thing about the mortgage is that an offset mortgage account eliminates the need to make any mortgage payments but still keeps the cash available. That's a nearly free improvement to flexibility. It does reduce the possible income level, though. It's close to having the cake and eating it.

There definitely will be down periods with most investments, it's just how they work. Though there are some with guarantees that provide good protection and using some of those is a possibility.

jgd12345 does have time to learn, so no huge hurry to get things done.