200k inheritance. What to do?

xylophone

I guess he probably is

Perhaps he should check and join up if he isn't? He has a good number of years before he will be eligible for state pension.

bowlhead99

If OH is earning little but still paying tax, it would seem to be advantageous from a tax perspective for you to use some of the cash that you're sitting on to allow OH to make enough contributions to an employer pension scheme or a private pension scheme that his tax relief each year cancels out his actual PAYE tax bill leaving him as a non tax payer each year. If his pension is going to be worth so little in retirement, then combined with state pension income he may not actually be a taxpayer in retirement because his total income is under the 'nil rate band' threshold. So, he could receive more pension income tax free than he is currently forecast to get.

This means it's a good deal to increase his pension contributions now, get full tax relief on them, and get the money back in retirement tax free.

The downside is the fact that the cash would be locked up for a while (until 55+). But if you were going to invest some of the cash anyway that is no bad thing (given you and he only have £30k of ISA allowance per year each).

An IFA could give you some useful comments on that. Free tax relief from the government plus an investment return, is almost certainly more valuable than a few pounds worth of interest at 1%ish gambled in the premium bond raffle each month, even if it is less 'exciting'.

davetrousers

You can only put £40k into Premium Bonds currently

http://www.nsandi.com/chancellor-announces-plans-nsi-2014-budget

DiggerUK

First thing not do, is pay advisers, they know about financial services and financial products, but have no training about what is a good place for your money. In short they know sod all about the markets.

Digger Mansions is closer to retirement than the pair of you, and we both have index linked pensions to look forward to.
We still have some money in NSI Index linked, but they are not available to you now. We keep the bulk of our instant access cash in Premium Bonds, and everyday cash in ISA's.

Majority of our retirement savings are in gold, not for everyone but you have a brain and I'm sure you can research yourself.
We consider any time frame of less than 5 years holding gold is high risk. It's also cheap as chips at the moment. Check the last 36 years price movements here.

Lots of info out there, just avoid the conspiracy gold bugs, they're all 31 grams short of an ounce.
..._

bowlhead99

DiggerUK wrote: »

First thing not do, is pay advisers, they know about financial services and financial products

Hmm, but surely understanding the financial services and products available including the risks, correlations and range of likely returns, together with tax planning is key to deploying your cash into a portfolio of financial products, so it seems somewhat bizarre that you would run a mile from them...

but have no training about what is a good place for your money. In short they know sod all about the markets.

Ahhh, avoid regulated independent financial advisers because they have had no training on how to deploy investors' capital across a portfolio of assets. Gotcha. I'm sure that's the case.

Either you have been smoking something funny, or you are just saying that IFAs can't predict the next movement in the market. If the latter, I would agree with that. Neither you nor me nor an IFA can predict the next movement in the market. For a couple in their fifties, predicting the next movement in the market is not the concern. Creating a financial plan that allows them to make the efficient use out of their new-found wealth to reach their goals over the next forty-odd years, is the concern.

Digger Mansions is closer to retirement than the pair of you, and we both have index linked pensions to look forward to.

OK, so you have no long term income needs, unlike ktk's other half.

We still have some money in NSI Index linked, but they are not available to you now.

probably not too much use then...

We keep the bulk of our instant access cash in Premium Bonds, and everyday cash in ISA's.

seems not unlike the OP, although she uses high interest current accounts that pay more than ISAs on everyday cash amounts, even if she were a high rate taxpayer.

Majority of our retirement savings are in gold, not for everyone

Clearly. It is speculative, doesn't pay an income, and would seem a funny thing to buy for the majority of retirement provision when interest rates are at all time lows and can only go up making a non-income-paying commodity relatively less and less valuable as time goes on.

We consider any time frame of less than 5 years holding gold is high risk.

We're agreed on that

It's also cheap as chips at the moment. Check the last 36 years price movements here.

"It's cheap as chips at the moment"... [points to 36 year price movements showing that it's higher than 32 of the 36 years ]:rotfl:

It's only lower than the last 4 of those 36 years, which had arisen during an unprecedented credit crunch, during which it had suddenly doubled to an unsustainable high in only a two year period from late 2009, or quadrupled to an unsustainable high in only a four year period from late 2007, depending on how you choose to look at it. So, it is now cheaper than those crazy highs, and investors who piled in thinking it was a one way street at £1200 have been badly and deservedly burned.

Yes it has come down since then while still being up overall in the '5 year' period that you'd consider to be meaningful. But it is hardly cheap as chips. Back in 2007 Q3, it was only half the current level. The long term average on that chart in the first 23 years of our 30-year chart before 2007 was significantly lower, in the £160-260 range. Now it is £730 and you think it is cheap as chips?

I am not convinced it is much of an investment portfolio plan to set you up for retirement, but given you already have two index linked pensions you probably don't need much in the way of wealth generation, and are only concerned with keeping some liquid cash on hand for fun and and perhaps a speculative commodity as a hedge against inflation. Most people with 40 years still to live would aspire to more, particularly if they didn't already have rock solid pensions, but I suppose we all have different investment attitudes which helps to make the world an interesting place

ktk

Thanks Bowlhead. That is really useful.

I think that I am going to have to fork out for an IFA. If i use the search for local ones on the NS&I will that be reliable? About how much will I have to pay?

Upwind

Not trying to ambush your thread ktk, but I am due to inherit over 100k shortly also and have been thinking about where to invest. I similarly have many of the high interest High Street opitions and have ISA's also. I was looking at the possibility of P2P lending in small chunks (£25-30k) to the three main P2P players (Zopa, Funding Circle and Ratesetter)for 3-5 year periods. I wondered if the collective financial 'experts' on here would consider this 'risky' or not?

oldtoolie

There's no hurry to do anything if you park your money in NS&I accounts.

Then do some thinking and talking with your partner about what you and your partner want to do with the rest of your life. Get a good recent book on financial and retirement planning for ideas on achieving this.

You may or may not decide then to seek outside advice on how to do it. But it is good to have some idea of what you want from your life and your assets before going to the advisor as they cannot tell you how to live your life.

ktk

Thanks oldtoolie. Are there any that you would recommend?

bowlhead99

Upwind wrote: »

Not trying to ambush your thread ktk, but I am due to inherit over 100k shortly also and have been thinking about where to invest. I similarly have many of the high interest High Street opitions and have ISA's also. I was looking at the possibility of P2P lending in small chunks (£25-30k) to the three main P2P players (Zopa, Funding Circle and Ratesetter)for 3-5 year periods. I wondered if the collective financial 'experts' on here would consider this 'risky' or not?

I would say yes. Making unsecured lending to indivduals or companies, in one country, for £75-90k total, using only 3 main platforms, is a bit 'eggs in one basket' to me.

If you don't already have any other asset classes beyond cash (say, investment funds that invest in shares, corporate and government bonds and commercial property, etc etc etc, both in the UK and internationally?), then it sounds like you are planning to put a lot of your whole 'net worth' in one asset class and one economy (the UK) and you are using few providers which gives you a risk of things going wrong.

There are lots of different types of risk, so bit of a long answer.

Keeping your money in low interest bank accounts (whether ISA or not) gives you inflation risk (long term, you will struggle to get a return equalling inflation and so you can never take any money out while still having the interest receipts keep up with inflation).

Also, it gives you shortfall risk (presuming you have some long term objective to actually make money with your capital, you are probably doomed to fall short of that because you can't make any money out of a risk free deposit account where the money just sits there until you ask for it back.

The higher interest bank accounts are nice and not to be ignored because the rates are better than inflation, and your deposited money is guaranteed, but are only really a temporary solution. Once interest rates rise and you can get reasonable rates all over the place (albeit with higher inflation, probably), banks will not want to keep blowing their marketing budgets to continue to stand out from the crowd by paying super premium headline rates on the first £x in your account. They will go back to other perks or account features or services or exclusive other products to tempt you in, as they did 5 years ago and 10 years ago and 20 years ago. So, at some point, current accounts will probably stop being a sensible home for your cash.

So looking at the p2p lending option as something different...

P2P lending is basically making loans at fixed rates to people or businesses. Again you have inflation risk because you are locked into a rate which won't rise as inflation goes up. You promise they can have your money for 5 years and they aim to give it you back. If the economy is booming and inflation is rampant and some of the businesses or people you lend to are very successful, you get your money back but you don't share in their profits in any way other than getting paid what they said you would.

Meanwhile, the people who aren't successful will just not pay you back. This is 'credit risk'. They just might not be creditworthy, even if they look like they are today. Some of the platforms put away 'rainy day money' to cover the loans that go bad. It may or may not be enough. Generally you pay tax on the interest you receive, but you don't get a tax deduction on the loans you made that go bad.

You also have the situation where they might pay the lending platform back the money, but the lending platform might not have enough people paying it back or taking out new loans to run its platform successfully and may go bust before paying you. In theory the loans are ring-fenced but in reality if they go under you will find it hard/impossible to collect what the middleman owes you, because you will have little pots of hundreds of loans directly with companies and individuals which you cannot effectively collect on yourself. Some administrator or rival lending platform or administrator may step in, to try to recover the loans for you over time, but might not do a good job; or might just instruct a debt collector to try to recover the money from the companies and individuals who took out the underlying borrowing at 20p in the pound because it's better than nothing. So, you have 'counterparty risk' - where a party to your investment transaction (the middleman investment platform is no longer solvent enough or resourced enough or bothered enough to see your transaction through to the end.

Unlike a cash deposit or regulated investment, there is no financial services industry compensation scheme covering P2P. In the case of savings, if a bank goes bust and can't repay you, you're covered. Not here.

You also have opportunity cost of locking into a loan for say 3-5 years because the market interest rates or investment returns on other opportunities might increase significantly while twelve months down the line, here you are stuck with your p2p loan that doesn't get paid off for another 2-4 years. You could perhaps call that 'liquidity risk'. If you commit to a 5 year lending program, then need or want the money for something else, you can't get it. Your assets are not liquid, they're locked up; the borrower is only going to pay back in line with the contract. Unlike cash in your instant access bank account or your shares or corporate bonds listed on the stock market, you can't just come up with a price for someone to take it off your hands with a day's notice. You are stuck with it through thick and thin. If you want to sell the loan on, second hand, there is not much of a secondary market, if any, and you won't get back what you paid.

So, if you get over the 'liquidity risk' problem because the platform has a method of giving you an early exit, you instead take on 'investment risk' because the market appetite to buy the loan off you just might not be there unless you're willing to offload the loan for less than you paid.

Also, the borrower probably has better terms than you. If he wants out, because Nationwide are able to give him a loan at 4.2% rather than the p2p company at 6%, he can probably just pay you off. So you get a portion back early and you don't get 5 years worth of interest you only get a couple of years. But you locked yourself into the contract so as a lender you didn't have the flexibility to get out early. So if market rates go down you just get your money back and have to reinvest elsewhere at a lower rate, while if rates go up you just have to suck it up and keep on with the loan you're stuck with. So, the risk of being exited from the lending arrangement early, and having to find something / someone else to invest in for the rest of the term while you keep the other loans running, is a type of risk.

You get repayments as you go along. So if you lend out £5000 over 60 months at 5% to an individual who wants to buy a new car, you'll get a bit under £100 back each month as it gets paid off in chunks. On average, if you start with a loan of £5000 and it goes down to nil, only a bit over £2500 on average will really be invested for the term because people keep paying you off every payday. You have to decide what to do with that money - lock it up for another 5 years at whatever the going rate is, that month? Or take it out to spend it? Unless you manage your account carefully, putting the money back on loan for shorter and shorter terms, you don't really get to deploy the whole £5000 for exactly 5 years and take it back at the end, which might be frustrating compared to a bank account or other type of investment.

Other risks? How about tax risk - at present you can't do this within an ISA or pension. Ok, it's not a risk, it's a certainty. For most people they receive back much less than the headline rate due to taxes as well as charges and bad debts. Meanwhile all taxpayers and future taxpayers can benefit from investments which offer tax relief - for example maxing your ISA allowances now and in the future, increasing your pension contributions to save income tax etc etc. Putting all your eggs into the p2p basket means you may not have the spare funds to take advantage of all these tax reliefs available to you. Deploying cash into unsecured lending may sacrifice the opportunity to use a tax benefit that the government is offering you now.

Worse, you may find that if ISA allowances are extended to p2p investments in a couple of years time, you can't participate, as your money is already tied up in 3-5 year loans and you can't have it back to invest in new loans or other investments inside tax wrappers for several years to come.

No doubt, p2p can be lucrative. According to the headlines, it pays a better return than cash. But that's because it is riskier than cash and no fool would use the service if they only paid returns at the same level as cash.

If you can afford to tie your money up for longer (i.e. you are not going to need to blow the £100k on a new house in 4 or 5 years) I would be allocating some of it to investment funds within S&S ISAs, some of it to investment funds outside S&S ISAs, some of it to pension, and some of it to P2P lending. £80-£90k of p2p if your only other assets are cash-based, seems you are missing out on equities, real estate, high yield bonds and so on, which can go inside S&S ISAs and pensions and provide you some long term growth. Rather than a fixed target return with credit risk and no tax advantages.

Edit
Worth mentioning the continuation with a few more points on another thread here
http://forums.moneysavingexpert.com/showpost.php?p=66922184&postcount=13

Lots of other p2p threads if you hunt around with advanced search on this board.