£30,000 to invest for 5 years...

ronaldadio

Hi all.
My wife and I are soon to get £30,000 inheritance and we are looking at the best way to invest it.
We are looking at using this money as a way of putting the biggest possible deposit towards a house in 5 years.
We don't want to take massive risks, but we are not risk averse - to an extent.
This is probably our last chance to build up a decent pot of money - my wife is 50 and I'm 53.
Any thoughts or questions?
Many thanks all

Gadfium

5 years is a short time for investing. How would you feel if your £30K became £18Kduring the next 5 years? Over time, investments (in equities) tend to out-perform cash, but the key word is "time".

10 years seems to be the minimum timescale for investing to become "safe".

ronaldadio

Gadfium wrote: »

5 years is a short time for investing. How would you feel if your £30K became £18Kduring the next 5 years? Over time, investments (in equities) tend to out-perform cash, but the key word is "time".

10 years seems to be the minimum timescale for investing to become "safe".

I can understand that, but I guess we don't have time lol
It may well be as simple as opening 2 cash ISA's, or even finding a simple saving account for 5 years.
The best way of explaining this is that we would prefer in 5 years to be left with say £31,000 instead of possibly making £45,000 but being left with £20,000 - if that makes any sense.
However, I think the question I'm asking is what is the best 'risk free' way of investing the cash for the best return.
Thanks for your comment as it makes me think now that we probably are risk averse with this lump sum.

droopsnoot

I'd suggest the issue with investing is that you want to get the money in five years, not specifically that five years is too short a time. If the market in general (or the specific things you invested in) is at a low point in five years time when you need to get the money, that won't be good unless you can afford to wait for it to (hopefully) come back up again, or had the foresight to cash out before the value dropped, which adds an amount of management to the investment. Investments seem a bad thing for anyone who has a specific time when they will need to cash them in.

For the sums involved you can currently get some quite good returns with a variety of interest-bearing current accounts which are described widely on here. That might not be true next year though, as is the nature of cash accounts - you just have to keep on top of things and move stuff around as required.

Al.

We talk about financial life cycles and five years is certainly as short as you'd want to be looking at. If the house is critical, and an outcome that can't be exposed to risk, have you considered biting the bullet and placing it in savings bonds instead? Lower returns maybe, higher certainty of outcome.

If you are 50 and 53, and if you were inclined to do so, I'd probably also look at using the pension wrapper too, to help you. Depending of course, on your current income (now and in five years), your tax situation and existing retirement savings. A small pot of £10,000 may be taken in one go, will being taxed on the amount that isn't part of the tax free cash component, outweigh the advantage of any 20/40% uplift?

Go cheap! You don't need to be overcoming any reduction in yield in five years, bought about through cost.

ronaldadio

droopsnoot wrote: »

I'd suggest the issue with investing is that you want to get the money in five years, not specifically that five years is too short a time. If the market in general (or the specific things you invested in) is at a low point in five years time when you need to get the money, that won't be good unless you can afford to wait for it to (hopefully) come back up again, or had the foresight to cash out before the value dropped, which adds an amount of management to the investment. Investments seem a bad thing for anyone who has a specific time when they will need to cash them in.

For the sums involved you can currently get some quite good returns with a variety of interest-bearing current accounts which are described widely on here. That might not be true next year though, as is the nature of cash accounts - you just have to keep on top of things and move stuff around as required.

Thanks.
5 years is a target, but I can't see why we could not hang on for longer if the situation at that time was not great.
And yes, simply putting the cash into a decent interest account is a possibility, with the option to keep moving it over time.
You think this option beats things like ISA,s ?

ronaldadio

Al. wrote: »

We talk about financial life cycles and five years is certainly as short as you'd want to be looking at. If the house is critical, and an outcome that can't be exposed to risk, have you considered biting the bullet and placing it in savings bonds instead? Lower returns maybe, higher certainty of outcome.

If you are 50 and 53, and if you were inclined to do so, I'd probably also look at using the pension wrapper too, to help you. Depending of course, on your current income (now and in five years), your tax situation and existing retirement savings. A small pot of £10,000 may be taken in one go, will being taxed on the amount that isn't part of the tax free cash component, outweigh the advantage of any 20/40% uplift?

Go cheap! You don't need to be overcoming any reduction in yield in five years, bought about through cost.

Our problem is that due to a business failure around 2007 we are having to claw ourselves back.
We don't have anything in the way of savings, we are both self employed and we have to rent.
The pension thing is interesting.
However, our thoughts were 3 fold...
1) By looking to buy a house in say 5 years, our outgoings would be reduced (no rent to pay any more - or a very little mortgage)
2) We can leave the house to the kids when we are gone
3) The house would become our 'pension'

As a side issue, we have thought about buying to let, but feel the problem associated with this could outweigh the returns v investing in some way

droopsnoot

ronaldadio wrote: »

You think this option beats things like ISA,s ?

Right now, based on interest rates for new accounts, I believe it does. Using the cash ISA allowance is great if you want to get cash in there in anticipation of a rates increase, but it's hard to imagine that rates will go particularly high in five years (though I have no experience, knowledge or insight to back that up).


Maybe you could consider splitting the cash up - keep some in various current accounts to get the maximum interest, but invest some on the basis that it might do better.

Al.

ronaldadio wrote: »

Our problem is that due to a business failure around 2007 we are having to claw ourselves back.
We don't have anything in the way of savings, we are both self employed and we have to rent.
The pension thing is interesting.
However, our thoughts were 3 fold...
1) By looking to buy a house in say 5 years, our outgoings would be reduced (no rent to pay any more - or a very little mortgage)
2) We can leave the house to the kids when we are gone
3) The house would become our 'pension'

As a side issue, we have thought about buying to let, but feel the problem associated with this could outweigh the returns v investing in some way

You can't risk it then, your capacity for loss is quite slim. I'd ask how much the house is that you want, what your cash flow is going to be like, can you really afford to tie money away in a pension, etc.

I suppose my gut instinct would be to sit down with a mortgage adviser now, and ask him what can be done with a cheap rate. Bear in mind, we know nothing of your bigger financial picture so this is all theory and conjecture.

Don't look on this cash as something to grow; more, as something that will allow you a foot in the door again. You can't jeopardise that chance for the sake of making (possibly) a couple of hundred extra quid.

The house will never be your pension, your house will be a home for you and the missus to grow old in together. And that's how it should be. Chat with a decent mortgage adviser, that's your priority I think. Investing and saving should be considered if you can't secure your home sooner.

Playing_with_Fire_2

What band of tax do you both pay? If you pay 40% tax, in your position, I would be thinking about opening a new personal pension, putting it in an index funds at around 50-60% high quality bonds and 50-40% global shares. To me, the risk in the shares would be balanced out (to my risk tolerance) by the tax uplift. Without the tax uplift, if this £30k was the bulk/all of my savings I would think about being more conservative and try to juggle high interest current accounts. You could put a portion into an S&S ISA and hope for some growth.

Depending on where you are planning to live, you may need to make additional contributions if you are looking to buy a house in 5 years time. You can leave cash or other valuables to your children just as well as a house, the changes in the Inheritance Tax rules are for joint estates over ~£650k or single estates over £325k.

Be wary about planning to use your house as a pension, it will reduce your housing costs, but the only way to extract money for food etc would be to downsize or have an equity release/reverse mortgage. In either of the above you couldn't leave it (all of it) to your kids.

mad_rich

ronaldadio wrote: »

We don't have anything in the way of savings, we are both self employed and we have to rent.

This caught my eye.

A lot of people would say it makes good sense to have a 'safety-net' of cash on tap should something unexpected happen. Somewhere between three and twelve months' outgoings generally (given you're self-employed, I would err on the longer side of this).

If you really have no savings, it might be a good idea to take this opportunity to build a safety net. That doesn't mean you can't earmark it for a house deposit as well, but having at least some in an easily-accessible place makes you a lot more financially stable.

I would agree that a pension wrapper might be a good home for some of the money. You would need to take advise on whether its possible, and how and when you could cash it in.

Even if you don't earn a penny, you can put £2,880 per year in a pension and it magically becomes £3600. Take advice, and you could buy a relatively safe, boring product within that wrapper.

Have you owned a house before? Help to buy ISA might be worth a look if either of you are first time buyers. The benefit is not massive, but it's still a no-brainer.

Beyond those, I would stick what's left in a Santander account(s). On no account would I 'invest' (other than possibly in a Pension, after advice, if it was cheap, and I could find a boring product...).

I'm not sure what you mean by 'our house would be our pension'. Pensions provide income. Your house would only provide income if you moved out of it to let it out. And then you'd need to rent a house...