What to do with large inheritance?

sc00by-d00

thanks to all of you for your advice and suggestions. Will definitely look into starting a Pension asap and will seek professional advice on this.

I think I will hang onto the property in SA for now. Will also diversify the shares globally on a gradual basis (don't want to sell when they are too low) and then bring in a big chunk of the cash to maybe invest in one more property over here and to obviously boost my pension once it is set up.

ruinen

sc00by-d00 wrote: »

Hi all

1. A house in South Africa worth approximately £120,000 – which is currently rented out for £5000 per annum.

2. A cash total of approximately £600,000 deposited across 3 South African banks in high interest Fixed Deposit accounts – earning 8.5% rate of interest per year

3. Shares worth about £1,200,000 – all in the same South African company - which produce dividends of approximately £30,000 per annum.

Maybe you guys can make suggestions that I have not already thought about.

My first thing would be looking at diversification. You've now got yourself set for a comfortable life, it would be unfortunate to have that disappear due to currency issues or that company's share price collasping, or those South African banks going bust (check what the protection is).

Also if you have a secure financial future then I would wanting to be minimsing hassles and effort that give such low return. That South African house we be yielding you less than 0.25% of your net worth per annum. It hardly seems worth the effort dealing with tenants etc.

I'd first focus on selling some of that £1.2m in shares. If you want to keep it in equity, then I'd put a good chunk into low cost index trackers (UK and/or Global). Maybe also just bank a chunk for now.

With the portfolio a bit more secure, I'd then start spending time thinking about what you want to do with you life.

typistretired

Might be a silly question but are the bank accounts, shares etc now in your name not in the name of your deceased uncle.

jamesd

You can reasonably expect to take between four and six percent of investable assets as income for life, depending on degree of caution desired. You have around £2.25 million so that's an annual income of around £90,000 to £135,000 before tax.

With a current PAYE income of only around £50,000 one thing for you to decide is whether you want to retire or switch the nature of how you make money.

sc00by-d00 wrote: »

I guess I'm just much more comfortable controlling my own money rather than being forced into buying an annuity.

The need to buy annuity with pension pots was removed under the last Labour government, back in 2006 or 7. Today you can still choose to buy one or more annuities if you like but you can also use income drawdown. There are two main varieties of income drawdown:

1. Capped income drawdown. The amount you can withdraw depends on your age and the 15 year gilt yield at the time of checks once every three years. At age 55 the limit is around 5-6% of the total pension pot value each year at the moment because gilt yields are unusually low due to the low Bank rate and fiscal easing. That rises with age to around 18-20% at age 85 at today's gilt yield.

2. Flexible income drawdown. If you have annuity, state pension or work defined benefit income actually being paid to you that is at least £20,000 a year you can take out all of the pension pot if you like, no limit at all. Once you opt for flexible drawdown you can never make any more pension contributions, not directly and not via an employer. The amount taken above the 25% tax free lump sum is normal taxable income in each year in which you take some.

In each case you are responsible for picking investments and managing the money to draw an income at a sustainable rate. Though personally I'd always withdraw the maximum permitted amount under capped drawdown and reinvest any part that I didn't need outside the pension.

For those with reduced life expectancy there is also something called a scheme pension, where an actuary works out personal life expectancy and what a sustainable income level will be.

Commercial property can be owned within a personal pension type called a SIPP. A mortgage of up to half of the value is permitted. Residential property is prohibited. It's fairly common for business owners to buy their business property in this way, with the rent going into the pension. Not restricted to just that case, though. Since you like BTL a potential application is business premises with flats above, business within the SIPP, flats outside.

If you get higher rate tax relief those things pretty much demolish many anti-pension arguments because once you take out the lump sum you're got back a big chunk of the money you put in.

Moving on, I'm very concerned about you having a couple of million Pounds invested in a country with a highly volatile currency when your main financial interests are all in the UK. Pretty much the first thing I'd want to do is repatriate much of the liquid money. If for some reason you don't want to do that, you should perhaps investigate options and other futures-related contracts that can reduce your currency risk. It would be sad to lose half of the Pound value of the money due to currency movements and that is entirely possible. At the moment you're fortunate: the Pound is at a fairly low value while many natural resources linked currencies are at relatively high values, though less high than in the not so distant past and the Rand is about 15% or so lower vs the Pound than back at the start of 2011.

Shares of £1.2 million in just one company is horrendously bad for risk. You should be aiming for no more than 5% of investable assets for maximum prudence, ten to twenty percent at the extreme for high risk takers. If for some reason you do not want to greatly reduce your exposure you should urgently investigate the use of options or covered warrants to protect yourself. No investment is good enough to make it worth exposing more than half of your investable assets to it.

You have a severe risk of near term major capital value drop based on reducing global risk tolerance as the US government tapers its fiscal policies, with emerging markets such as South Africa likely major losers that are already suffering from the start of a sell-off.

Given your income and high risk tolerance you might also find it useful to look into making some use of isePankur. A search here is a goods starting point. Euro currency risk but it seems viable to achieve interest returns in excess of 20% after bad debt, before tax. Somewhat limited investing speed at present if you use good levels of diversification. Peer to peer lending, rather like the old Zopa model but somewhat better.

If you want more BTL you might perhaps want to look into using mortgages to diversify more across areas. Ten or so properties with mortgages put you in a more secure income situation and have the tax break of interest deductibility from rental income.

You should investigate some use of VCTs. You get 30% tax relief on the way in, limited to income tax actually paid in the tax year of investment. Has to be repaid if you sell within five years. Income is tax free and no capital gains tax. A broad range of highish risk investments of very varying risk levels available. You can get the tax relief again every five years by selling and buying again.

First things on the to do list are to reduce the horrendously high exposure to a single company and cut back greatly on the single foreign currency risk.

You should get professional personal tax planning advice before acting, but get it quickly.

You might usefully consider finding an IFA and allocating them say half a million of investments to work with, including your full S&S ISA allowance. The brief for this could be something like capital protection with no more than about 20% maximum drawdown potential (meaning downward volatility of 20% in one year). The purpose is to provide a backstop for anything else you do: half a million is enough to provide a quite good income even if everything else fell apart. Part of a diversification plan. A suitable IFA will also be able to handle at least part of the the tax planning needs and recommending an appropriate person or firm for more specialised advice.

sc00by-d00

typistretired wrote: »

Might be a silly question but are the bank accounts, shares etc now in your name not in the name of your deceased uncle.

the accounts and shares are now in my name. prior to his death my brother and I had opened bank accounts in the same bank as my uncle with nominal amounts. After probate had been granted and taxes had been paid the remnants of his accounts were transferred to the accounts held by my brother and I whilst the shares were changed into our names.

typistretired

You sound very efficient and I am sure you will make the right decisions about what to do with your inheritance. I found with an inheritance a few years ago the changing of the shares names needed all sorts of paperwork.

atush

But you really really need tax advice, stat.

jamesd

Are you familiar with these things:

1. Forward currency contracts. You can use these to fix the exchange rate on a term deposit account, so you're certain of how much you get at the end. Might use this for the money you have on deposit if you can't move it immediately.
2. Share options. You can use these for at least larger companies to reduce your exposure to up and down movement in the share value. So if you don't want to sell you can reduce the risk by buying a product like this to cover some of the value.
3. Currency futures or options contracts. Can be used to reduce the exposure to currency moves but without committing to buying/selling at a specific time. Can protect the value of a share holding from currency risk.
4. Currency regular payments contracts. Can be used to fix the exchange rate used for rental income.

primalgeek

sc00by-d00 wrote: »

In addition, as I contract through my own limited company if I did start to contribute to a SIPP, I would not have an employer to make additional contributions. Any contributions my limited company would make would be money out of my left pocket and into my right pocket so to speak.

You do have an employer to make 100% of the contributions on your behalf... Your own limited company

I'm going to assume that you operate your ltd co. in the 'normal way' of small salary with the remainder of your income as dividends from the companies net profits:

Any money that your ltd co. contributes to a pensions is treated as an expense and therefore is excluded from corporation tax (20% small business rate). Furthermore, once you become a higher rate tax payer (which you are) there would be a further effective rate of 25% taxed on net dividends (22.5% grossed up) paid via self assessment. Putting it all together for each £60 you reduce your net income by, you can invest £100 in a pension, just like any other 40% tax payer.

atush

You do have an employer to make 100% of the contributions on your behalf... Your own limited company

I had missed you we operating as an LLC- does your firm have an accountant? Call him asap (he might have a referral for a good tax guy too if he doesn't have tax specialist status).

You can have the company pay 100% of your pension contribs, save corporation tax, Nics, your own income tax/nics (or do you pay yourself dividends?) anyway, lots of tax to be saved on pension contribs.