What to do with inheritance money?

JuniorSherlock

My father-in-law has offered us some of my husband's inheritance money now as they say they'd rather us have it whilst we need it, which is very thoughtful of them. At the moment it is tied up in bonds and shares.

My husband wants to buy a decent car and then have a nice family holiday this year.

I would like to put some away for our retirement as currently we have no pension plan and we are both middle aged.

However we could also use it to pay off some of our mortgage or upgrade to a larger house as this one is quite small for two growing children.

We know we'll probably need to get a financial advisor but I just wanted to ask, in the current climate, is it better to pay off some of our mortgage or invest in a larger, better placed home that we can then downsize when the kids have left home and use the profit made as a pension?

P.S. I've put this in here as it's really an investment I am looking at so this seemed the most relevant thread rather than pension plans or mortgages.

qpop

No retirement provision? Start there.

A decent car will not be decent in fifteen years time, and the family holiday will be a distant memory. How would you feel living on the current basic state pension of ~£5,100 PA each? (assuming you have the NI contributions).

Buying a bigger house is arguably as flippant as car/holiday in the sense that downsizing, whilst a nice concept, relies on a host of factors being in your favour.

edit: The mortgage paying off idea is harder to quantify; it really depends what rate you are paying and your attitude to risk. Also, what would you do with the income released from paying the mortgage? Would this go into retirement saving?

JuniorSherlock

Thanks, that's kind of my thinking although dh argues that as he uses the car every day to drive 30 miles to work and back and we regularly use it to visit family 200 miles away, that getting a decent car is an investment as we won't need to keep forking out for repairs. Family holiday is just a little bit of luxury to treat the kids which I don't argue with as we don't spend more than £500 on any holiday and won't do this time round.

We have a 20 year mortgage at the moment so he was wondering whether it would be prudent to lower it to 10 years and therefore save on the interest payments? Or sell this one (it's now worth £15k more than we paid for it) and get a larger house based on the assumption that house prices will rise within the next 10 years or so, which means that should we then downsize we'll make a profit which we can use as a pension pot.

Private pensions are too risky for us and we are not natural investors (i.e. clueless) but I do know that this recession can't hold forever so a long term investment may make good sense. However wouldn't paying off a mortgage or investing in a larger house also make a sound investment in this current climate? After all, yes we are risking that house prices will go up but any investment is a risk and dependent on many factors.

Perhaps we could do both? Pay off some of the mortgage and invest the rest?

We are also aware of tax issues - will investments we make be hit by inheritance tax? (Again know nothing about it really, but parents are not dead yet so is it still classed as inheritance tax?)

McKneff

Show your OH this thread and then sit down and talk to each other about it.

Is father in law gving it to him or to both of you.

qpop

You're thoroughly confused by the concept of an "investment".

A car is not an "investment". It is a purchase of a luxury. The argument that a nice car is an investment as you use it a lot is moot; the truth is that a nice car is a luxury that you may enjoy, until you need to buy a new one. At this point you'll sell it for a large loss - not a sensible investment at any rate!

Likewise, a larger house is equally a purchase of a luxury. Yes, the value of the house may well have risen in 10 years, but the price of equivalent smaller houses is likely to have risen too.

In terms of riskiness of pensions - are private pensions riskier than making no pension provisions whatsoever? Will you both be happy living on a joint income of ~£10,000 per annum?

The inheritance tax issue is your parents-in-law's concern, but briefly; the money given to you will most likely by a "Potentially Exempt Transfer", and won't incur an inheritance tax liability unless they die within 7 years. It's far more complicated than that but they should speak to an accountant/IFA about it before giving you the cash. They should also keep records of the gift.

edit:
Also, the most important thing to do (generally) is pay off any expensive debts first, before you do anything else. Expensive is typically anything that carries a higher interest rate than a mortgage (credit cards / personal loans).

JuniorSherlock

Luckily we don't have any debts other than the mortgage as we never buy what we cannot afford.

Yes you are right of course, cars and houses are not investments, what I meant was that we end up spending lots of money on old bangers that are forever breaking down instead of buying a decent car that runs well.

Father in law is giving the money, I presume, to my husband.

So your advice would be a pension then? I have to admit that I would much rather have that security for our futures. My husband thinks differently which is why I am asking on here. I will show him this thread and we can discuss it further. We will also get an independent FA in to advise us further. I doubt his parents will get an IFA but I am assured that the tax issues have been looked into and perhaps that is why FIL is choosing to give us this money now rather than later when it will be subject to inheritance tax.

So for a long term investment of around 20 years, would we be wise to get some kind of pension plan or look into what has already been done with the money, i.e. bonds and shares?

psychic_teabag

OTOH putting it into a retirement fund isn't really "having it while we need it", which is what the FIL wanted. Otherwise could just let FIL hang onto it, and pass on a bigger pot later which would be no less useful as a retirement fund. (Well, except that OP might be able to invest it higher risk than FIL might choose.)

e.g. if FIL is a long way away, perhaps he is thinking that if you had a decent car, you might bring the grandchildren to visit more often ..?

JohnRo

Sorry if I have missed it but how much money are you talking about? That might limit or exclude some options.

It is my experience that if you do talk to an IFA then make sure you get at least a second opinion. I made the mistake of not doing so and learned the hard way that there are good IFAs who will genuinely and sincerely help you invest properly for a perfectly reasonable fee and not so good IFAs who will simply help themselves.

Just by posting here I was able to turn around an unfortunate financial arrangement I had placed myself into just over a couple of years ago.

SeniorSam

Junior Sherlock,
If you use the money to pay off the mortgage, presumably you will have more of your income to either invest into pensions or savings from the reduction in your monthly payments. You could also use that extra surplus to go on holiday, or to invest.

Not knowing the amount of your gift, or the mortgage liability, the interest on your mortgage will likely be higher than you could expect by investing the cash in 'secure' investments. Therefore, reducing or paying off the mortgage may be a wise move.

Gifts from parents should be made jointly, rather from one parent. This is to reduce the liability to the estate should either die within 7 years of making the gift. If parents are in good health and their estate is likely to be liable to inheritance tax, they could conside a decreasing term assurance for 40% of the value of the gift. This would cover any inheritance tax liability of the gift if there were a death and premiums may be small.

A good idea to take advice from an IFA, even if you decided not to take that advice. Most IFA's will discuss matters with you without obligation, but best to see advice from more than one and make sure that the advice is from an IFA and not a 'tied' adviser as there will be more options.

Good luck

Sam

JuniorSherlock

Sorry, the inheritance is of course from both his parents although it is primarily his father who has made the decision.

The total sum is £65k. We have a mortgage of around £75k on a house that we bought for £121,500 (we used the sum we had saved from a previous sale as a deposit). Our mortgage deal is only a year old and is a good one, so our mortgage repayments are just around £450. Interest rates are low at the moment so in my mind it does make sense to pay off some of the mortage as rates will inevitably rise in the future, then as SeniorSam says, with the excess we could invest in a high interest (ha!) savings account or even low risk investments.

With the work we have done to the house so far and looking at the sale of other houses in this area, we know we could get around £135k now. It's a small 3 bed and in time it will be insufficient for our 2 children as the third just about fits in a very small 3rd bedroom. Which is why my husband is also considering the option of using the money to buy a larger house, which we can sell at a profit (should house prices rise in the next 10/15 years) and use that profit as a retirement pot, although I think we'd then be hit by capital gains tax would we not?

We will use some of the money to make our lives a little easier but my priority (which my husband doesn't quite share) is to make sure that we are a little more secure for the future. It is a huge worry not to have any kind of pension provision and as we both get older, I worry about the future of living on a state pension.

Any advice I get on here would be greatly appreciated and would be compared to any advice offered by an IFA.

atush

Ok, first of all I agree with most of what has been said. But seeing the money will be given to your husband, and he has a bee in his bonnet abt a new car- compromise. A small portion of the money could be used to buy a low mileage late model used car for a sensible low price. I bought one for my boys and it cost me abt 6K- with a one year warrenty. Resist all of his temptations in buying new, as that is just flushing money down the bog. A modest holiday might be OK if the gift is in the larger range, but no trips to Flrida if just given 20K.

We don't know the size of this gift, so it is really hard to help you decide what is best as there is a big difference in what we sould say to do with 20K, and 200K.

Edit, as you have now said how much. I would not pay off the mtg unless the rate is high, and I don't think you can justify a bigger one w/o looking into the improvment suggestions i made.

Then, look at your mtg. If you are paying interest higher than 3%, it might be in your interest to pay some/all of it off. Look at maintenance you should have done but put off, and perhaps any improvements to the space what would increase the value of your home such as loft extension, converting the garage for your children's use etc.

Pensions for both of you would be on the agenda, and if you aren't up to learing about investing you can use an IFA or do a DIY pension with 'lifestying'.

Then I would keep some in an emergency fund if you don't already have one, use your cash ISa allowances. Perhaps set up something for the children too.