Help investing £21,000 please

moose24

Hi all,

Would just like some help on how to best save a lump sum of £21,000 that I am due to inherit in the next week or two.

I have had a look on the MSE website however I'm a bit confused of the best route to go down, either NISA or current account, due to my current situation which I have explained below.

Any help and advice would be gratefully appreciated.

My current situation is as follows:

I currently owe £4,500 which I have switched this week to 0% balance transfer credit card which lasts for 30 months.

I'm 30 and work full time, earn about £1,275 after tax per month, but also study part time at university so have a 123 student current account with Santander. That account has a £1,750 interest free overdraft which I'm often about £1,650 in to by the time pay day comes around. My course finishes January 2015 so I'm guessing Santander will slowly start to reduce the overdraft from then.

Other than that have a joint current account with my partner however we don't let it get overdrawn and is only used for paying bills from.

I've got a cash ISA with santander with about £750 as currently saving for a wedding in 2016.

I have a 25 year mortgage on a £75,000 house which we pay £385 back a month, which is a fixed rate until next March.

Finally I only started my works pension 2 years ago so I'm a bit behind on that with starting it so late.

Don't struggle month to month but realise I need to get the credit card and overdraft reduced. I won't really need access to the bulk of it as long as circumstances don't change drastically.

Thank you.

kidmugsy

moose24 wrote: »

... how to best save a lump sum of £21,000 that I am due to inherit in the next week or two.

I currently owe £4,500 which I have switched this week to 0% balance transfer credit card which lasts for 30 months.

So you'll need £4,500 in 30 months time.

moose24 wrote: »

... have a 123 student current account with Santander. ... so I'm guessing Santander will slowly start to reduce the overdraft from [Jan 15].

You'll need ca £1650 in January.

moose24 wrote: »

I've got a cash ISA with santander with about £750 as currently saving for a wedding in 2016.

Heaps of cash required in 2016.

moose24 wrote: »

I have a 25 year mortgage which is a fixed rate until next March.

.

You might want to pay off some mortgage debt in March if that lets you get a lower interest rate because of a lower LTV.

Otherwise it looks to me as if you should be using interest-bearing current accounts until, at least, you are married. Then you can take stock, and consider pensions. Meantime, consider moving your joint current account to an interest-payer too.

moose24

Thank you for the advice kidmugsy.

Forgot to mention I'm paying the £4,500 off at £200 a month and won't need to pay the £1,650 back in full in January as santander will probably just reduce the overdraft gradually.

bowlhead99

IMHO there's no point going into an ISA as, for example, the Santander ISA which is not much different from the rest of the market only pays 1.5% (unless you are willing to fix for a long period) while current accounts such as their 123 account pays 3%(2.4% after tax). That after tax rate is higher than you would get on an ISA even if you committed to lock the ISA away for 2-3 years, which IMHO would be unwise given you have an opportunity to refinance your house penalty-free next March.

The student account comes with a nice perk of the interest free overdraft, but the value of this free money now you are back on your feet with positive cash, is limited to whatever interest you can get on the £1650 pulled out of that account and saved or invested elsewhere. Which is only a few percent a year. Even if you balanced it perfectly on the limit every day, which you aren't going to be able to do without risking going over, if the account is active - two or three percent of £1650 for the next 6 months 'til your course finishes is only about £20 of extra interest earned.

The Student version of the 123 account only pays 3% interest up to £2k of positive balance. As you have a job and are making regular deposits, you might as well forget the overdraft perk you currently have, close down the old account and turn it into a grownup 123 account. The proper adult version pays 3% on balances over £3k up to £20k.

So, with a new £20k in the account, your average balance each month would go up from negative £1k up to positive 19k, and you'd be earning 2.4% after tax on all of it.

That is the simplest thing you can do to get a reasonable rate on all your money and still have access to all of it as an emergency fund, wedding fund etc. I mean, you could get more by using some current account deals with a bunch of other banks (5% at Nationwide, 4% at Lloyds etc) but they only pay those promotional rates on the first few thousand so you'd need several of them and keep your money circling around them to meet the terms and conditions.

However, if you suddenly have £19k in a current account you might be very tempted to spend it. So perhaps a smarter thing to do is to get a proper 123 account to store this large stash in as a medium term savings account, simply paying enough in to meet the terms and conditions of the account and get the 3% interest, but practically do your spending out of another account elsewhere (like Lloyds or Nationwide) with a lower day to day operating balance.

Sounds like your current house deal at 25 yr, 75k , £386pm is about 3.75%. You could probably make some overpayments in advance of your deal ending which would effectively save you 3.75% on each pound of money - as good as earning 3.75% after tax on a savings account. However there might be restrictions on how much you can pay back, and also you don't want to pay off too much right now because you then have to remortgage to get it back, which would be difficult if you lost your job etc.

But when your house fix ends in March you should have a good look at what rate is available in the market for a new fix. What you might find is that by throwing some of your spare cash into the mortgage, penalty free at that point, you can get it down to a threshold point where the loan-to-value ratio flips from say 85% to 75% and gets you a better rate on the entire borrowed balance. So not only would you save say 3.75% per year on the money you are paying off , but also some fraction of a percent per year on the whole 75k, compared to what you would have been charged at your current loan-to-value ratio. This can be a gamechanger in getting your mortgage down quickly.

I wouldn't focus on the pension for now - as long as you're contributing enough to get the maximum employer contribution (free money). But as you're not a high rate taxpayer there is not a massive advantage in paying a few thousand extra into the pension at this point - you could always do that a few years down the line instead.

In summary:
- Clear your overdraft because it is not enough free money for long enough to make a proper return out of it.

- Get a proper 123 account that lets you store up to £20k at a decent rate.

- start using another bank's current account for your day to day spending to avoid temptation of burning through the £20k

- throw a bit of extra cash into the mortgage, maybe a couple of thousand over the rest of this year depending on overpayment penalties, but not too much as you can reassess options in half a year anyway

- reassess your mortgage deals in Q1 next year and consider dropping your £75k mortgage to £65k to access a better rate when your fix runs out

- don't pay off more than £10k of your mortgage, because out of the £20k you need ~£2k to get you out of overdraft, ~£5k to clear your credit card when it stops being free, and £3k+ as an emergency fund which you don't really have at the moment (you would burn through a £750 wedding fund in no time if you lost your job). So, don't be too ambitious and overstretch yourself when the mortgage refinance offers come around.

- also, don't be tempted to blow your inheritance on a massive wedding party and honeymoon despite inevitable pressure from your other half

You are being given a great headstart in life and if there is some spare after getting your mortgage down to a reasonable level (i.e. throwing more money in the mortgage doesn't get it down another notch of loan-to-value), put some in an S&S ISA and come back to reassess in 10 years.

Final thought:

moose24 wrote: »

Forgot to mention I'm paying the £4,500 off at £200 a month

No credit card makes you pay back at >4% a month. It won't even have anything left in two years time if you pay it off at £200pm. It is free money that you could be earning savings interest on. Put the money somewhere safe that earns interest, and make minimum payments by direct debit, unless you have zero willpower.

and won't need to pay the £1,650 back in full in January as santander will probably just reduce the overdraft gradually.

Probably but as it is not a very big amount of free money and it's time restricted, you might as well can it altogether as suggested above, rather than try to exploit a few pounds a month of interest from it.

moose24

That's some great advice bowlhead99, thank you for going to all that effort it's much appreciated.

Fruit_and_Nut_Case

OP: Does your partner pay tax? Consider putting some or all the money in his/her name and have the interest paid net.

moose24

She works full time too and pays tax however doesn't have a NISA or ISA (whatever they are known as these days) if that makes any difference.

colsten

Neither of you should bother with ISAs for the money you are planning on spending in the next few years. Everyone with a decent credit record should be able to open the best interest paying current accounts and use them effectively as savings accounts which pay more net interest than any cash ISA. The current accounts take about £50,000 per person between them, plus you could have some joint accounts.

heytoki

I would pay off as much as i could of my mortgage. Do this before the interest rates go up.