What to do with lump sum?

enthusiasticsaver

Just completed today on the sale of a flat we bought five years ago for our daughter to live in while studying for a PhD in the Midlands. She has now bought her own house so we now need to decide where to put the £40k left over after repaying the mortgage we took out to buy it. Really pleased to be mortgage free again :j I am thinking £15000 in the best paying NISA I can find as I have not invested in one this year. My husband is a higher rate tax payer so is best to leave in my name and am thinking of putting £25000 in a bond of some sort - possibly the Virgin Money 2 year which pays 2.10%. The other alternative is to open a second Santander 123 account in my sole name, we already have a joint one but wondered if anyone had any other suggestions?

Motormad

I would defo open a Santander 123 in your name,you'll get 2.4 percent after 20pc tax and the best bit is its not tied up.I opened one today and we have 3 between us and wish I had got them before when they allowed 2 sole accounts.

jimjames

Does the £40k include the CGT on the sale? Presumably it was taxable if it wasn't your main home?

If you've not paid the tax then you'll need to keep that aside to pay.

If you're prepared for the risks of property investment have you looked at S&S ISAs? Likely to be far better returns long term than cash.

Eco_Miser

There are other current accounts paying between 3% and 5% on limited amounts. BOS Vantage (3 each allowed) 3% on £5000, Lloyds Club 4% on £5000, TSB 5% on £2000, Nationwide Flexdirect 5% on £2500.

Cash ISAs are generally paying rather less than current accounts after 20% tax, so don't feel you have to open an ISA if you can fit your money into current accounts.

enthusiasticsaver

Thanks for all the suggestions. There is no CGT liability on the flat as we bought in 2009 for £60000 and sold today for £66000 so well within annual limits. I realise Cash ISAS are paying less than current accounts but I really want to shelter it from tax. Have just in fact opened a Coventry Building Society fixed rate one for 4 years at 2.6% which matures in 2018 just as me and hubby plan to retire. I think I will take up suggestion to open second Santander 123 sole current account so just checking criteria to see what I need to move. Does anyone know if the direct debit for paying the Santander 123 credit card would count as one of the direct debits you have to set up? I could move my mobile phone one too and the two combined would be around the £500 minimum monthly transfer in as obviously I do not want it going above the £20k.

enthusiasticsaver

I am reluctant to look at S and S's as invested in them in the past and have been unlucky in that we have had to withdraw and make loss due to market conditions at the time. Once in the 90s recession and then again in 2005. Maximum 5 years is all I will consider.

jimjames

enthusiasticsaver wrote: »

I am reluctant to look at S and S's as invested in them in the past and have been unlucky in that we have had to withdraw and make loss due to market conditions at the time. Once in the 90s recession and then again in 2005. Maximum 5 years is all I will consider.

That's fair enough, but S&S shouldn't be money that needs to be accessed in the short term.

If you'd put your house money in the UK stock market instead of buying the house then you'd have £120,000 rather than £66,000 over the last 5 years but past performance isn't a prediction of future.

kidmugsy

enthusiasticsaver wrote: »

we now need to decide where to put the £40k left over... My husband is a higher rate tax payer

Why doesn't he make a pension contribution to reduce his income tax bill? Pensions are becoming very flexible for people aged 55 and over.

enthusiasticsaver

kidmugsy wrote: »

Why doesn't he make a pension contribution to reduce his income tax bill? Pensions are becoming very flexible for people aged 55 and over.

He already pays in the maximum to his pension but yes good suggestion. He really does not want to bothered with finance and thinks I am mad to even worry about it but I suggested he increase pension payments about 15 years ago and he is now able to retire at 60 in 4 years time on a really good pension - much better than mine sadly!

enthusiasticsaver

jimjames wrote: »

That's fair enough, but S&S shouldn't be money that needs to be accessed in the short term.

If you'd put your house money in the UK stock market instead of buying the house then you'd have £120,000 rather than £66,000 over the last 5 years but past performance isn't a prediction of future.

We invested in the property in 2009 to give our daughter a roof over her head at a nominal rent whereas if she had rented privately it would have cost her £450 per month for a 1 bed flat which would be £27000 over 5 years. As we were not getting any decent return on it we were quite happy to do that. I really do not think £60k in the last 5 years would have doubled especially over 2008 to 2011. What evidence do you have of that? It is only in the last two years returns have come back.

bowlhead99

enthusiasticsaver wrote: »

I realise Cash ISAS are paying less than current accounts but I really want to shelter it from tax. Have just in fact opened a Coventry Building Society fixed rate one for 4 years at 2.6% which matures in 2018 just as me and hubby plan to retire.

Doesn't make much sense to me. Seems like you have locked into a fixed low rate when you could have had a pretty similar, or better, net rate after tax outside an ISA on instant access and the knowledge that if interest rates move next year they are only going upwards. The 2.6% you've got is only fractionally better than the Santander 123 as a basic rate taxpayer (a one-stop shop with easy instant access up to 20k) and is worse than a combination of Nationwide, TSB, Lloyds and Tesco (paying 5 %, 5%, 4%, 3%).

I get that you want to 'shelter it from tax', but the sheltering is costing you as much or more in interest given up than you would have been paying in tax. Also, it seems like you only have 40k to try to put away this year because you sold a property. Presumably next year and the year after you will not sell a property and will not have a windfall to allow you to max out your ISA. So, you could have simply moved it from the great value high rate instant access current accounts into an ISA in a later year instead, and still 'shelter' it in good time for your retirement.

Also, given you are a basic rate taxpayer and hubby is a higher rate taxpayer has he maxed his ISAs too? Typically the person earning more has better retirement provision, so it is more useful for them to have the tax free income source in retirement than it is for the person who was the weaker earner and who may not have any kind of tax problems from high taxable income in retirement anyway. Morbid, but you might not both be around to share cash between you for the full length of your retirements, so consider what method gets each of you a decent amount of assets at a low tax rate.

So, if you were looking at putting money in taxed accounts like a Santander 123 now, makes sense for you to do it because you have the low tax rate. But if you were looking at putting money in a tax protected wrapper, makes sense for him to do it because it's him that has the greater need for a tax protected wrapper. Perhaps he has used up his ISA allowance this year, but you didn't say he had.

The obvious bit that you seem to be missing (perhaps due to your reluctance to engage with 'investments') is that you are both retirement age and so pension is a very valid thing to consider. If hubby makes a £10k pension contribution he saves £4k in taxes he was otherwise going to pay. A £20k contribution (maybe split over this year and next if he isn't a full £20k into the high rate tax band) saves £8k.Then the £10k/£20k grows tax free, a quarter of it escapes tax altogether (tax free lump sum) when he eventually takes it and the other three quarters only attracts tax at his marginal rate in retirement - which he can possibly phase over several years to keep it in the basic rate band.

Presumably if you are willing to lock the cash into a fixed term ISA at a derisory rate for 4-5 years you would not miss it if you had instead put it in hubby's pension and locked it away there for the 4-5 years instead. The free tax relief would go a long way to offset any market declines and there are of course a huge range of assets in which he could invest within a personal pension or SIPP, most are not as volatile as the FTSE. Also, potentially you don't need the cash back in a lump sum on retirement day anyway, if it's generating an income that's useful in retirement - and taking it back in cash in 2018 just leaves you the problem of redeploying it anyway if you don't have a defined purpose for it. So if the market takes a dip in a couple of years and takes another few years to recover thereafter, it's not necessarily a big deal.

So, without knowing the exact detail of your husband's income and tax situation, my suggestion for the £40k would probably have been to strike a balance ; putting away £20k pension contribution for hubby, making a great tax saving, and then £20k in your name in Santander 123 (or a greater number of accounts paying better interest, if you can be bothered setting them all up) to get 2.4-3%ish net on instant access.

Then if/when in some future year the relative value from current accounts drop off a bit, you can consider whether to make even more pension contributions for hubby, or ISA contributions for hubby, or ISA contributions for yourself, so that one way or another you move it into a tax shelter eventually but perhaps not doing that right now which loses flexibility.

You may think 'ah well that would probably have been a good idea after all but I've just gone and set up that 4 year ISA'. If in hindsight you don't want that ISA, then get it back out (it's not like you'll suffer much of a penalty because you've only had a day or two's interest anyway) and use the different methods instead.

As a side note, yes a direct debit for a credit card and some sort of phone bill or mobile bill would be fine to meet the S123 criteria, although if you have some spare utility bills that are not already going through your joint Santander account it probably makes sense to use them, because you get cashback on a variety of utility bills whereas you don't get cashback for simply paying off a credit card.