£80,000 and clueless

apitt100

Hi, im new to mse. I have just come into some money(£80000) and not sure what to do with it. If i put it in a savings account will i have to pay a higher tax code on it? I earn about £19000 a year in my job and owe about £48000 on my morgage, would i be best paying my morgage off and paying an early penalty? or saving it? or spread it around to avoid paying tax on it? Im just abit confussed at moment

Primrose

My own reaction would be to investigate what the penalty would be to pay your mortage off and then do so if it is a reasonable amount. This will give you some debt-free peace of mind and the basis for building up a longer term investment plan. The annual interest on the remaining sum would not put you into a higher tax bracket on your current income. I would then tuck away about £5,000 in a separate high interest savings account for long term emergencies and contingencies, and if you are not adverse to risk, invest the remainder in a good selection of unit trusts, You will probably need some guidance from a good Independent Financial Advisor. However, every tax year I would use up my annual £7,000 ISA allowance in unit trusts to ensure that eventually all the investments are eventually covered in a tax-free wrapper. If, having paid off your mortgage you spread the rest around in various cash-based savings accounts, in the long term the value of your money will be eroded by inflation. You have many years ahead of you, so can afford to ride the ups and downs on the stock market. Good luck. Enjoy your good fortune. And make sure that you make a Will, if you have not already done so.

Steve_xx

You would earn about £5040.00 per year on it if you banked it in an account with interest at 6.3%. Tax at 20% would be deducted at source, leaving you £4032 nett. If you earn £19k per annum your tax situation would not be affected.

Depending on how you came by the £80k, you might be liable to Capital Gains Tax. If you inherited it then you wouldn't be liable for CGT. But if you obtained it via other methods, then you might be liable to CGT.

Regarding whether you should settle your mortgage early - only you can decide that based on the costs of doing so. Obviously if the rate of interest on your mortgage is less than the rate of interest you could get for having the money in the bank, then you should keep the mortgage going because the interest on your savings will be paying the interest on the mortgage.

Primrose

My own reaction would be to pay off your mortgage if there is not a high penalty for doing so, if only to give yourself debt-free peace of mind for the future. The interest you receive on £80,000 would not put you into a higher tax rate on your current salary. I would then put around £5,000 into a high rate savings account for Emergency money, and if you are not averse to a small risk, invest the remainder in a selection of unit trusts, seeking the advice of an Independent Financial Adviser. However, every year I would make sure that I switched £7,000 of my investments into an Equity ISA to take advantage of my annual ISA allowance. Over time you should try and ensure that all your investments are gradually moved under an ISA wrapper to save tax (including your Emergency money in Cash ISAs). If you pay off your mortgage and put the remainder into cash savings, over time its value will be severely eroded by inflation, whereas investing in equities (unit trusts) should ensure that the value of your investment will increase and beat inflation. Enjoy your good fortune. And don't forget to make a Will, as if anything happened to you, there would be considerable assets in your Estate.

Primrose

Whoops. Don't know what happened there. My first post disappeared so I retyped it, but the message is basically the same.

jamesd

If you have an early repayment penalty for your mortgage it's unlikely to be worth paying it off immediately. Usually better to wait until the penalty period has ended. Depends on the penalty amount/percentage, time to end or reduction of the penalty, mortgage interest rate, after tax interest rate available elsewhere. If you can say what those are someone will be able to work it out for you.

The long term returns for the UK and world stock markets is 12% a year or so and good funds (unit trusts, OEICs) do better than that, so investing can be expected to make you significantly more money than the interest rate saved by paying off the mortgage early. You can buy unit trusts and OEICs outside an ISA as well as inside and that's worth doing if you don't have any pressing need to spend the money in the next five years. Five years is to allow for the chance of a stock market drop and recovery after the drop.

I suggest that you read Ok then - How do I choose a S&S ISA to get an idea of what a sector allocation is and what you or an an IFA should be doing if selecting funds, to spread the risk.

If you want to use an IFA's help, the services you ask for should include:

• Initial sector allocation using Watson Wyatt or comparable method.
• Investment selection advice within the sectors.
• Annual rebalancing.
• Advice on fund changes if a fund manager changes.

This all looks a lot harder than it really is once you start experimenting with it. Just be sure you don't put all the money into one fund or jump on the latest hot area (was technology around 2000, now it's China or Asia-Pacific emerging markets). Some in the hot areas is fine - say as much as 10% or even 20% depending on target risk level - just not all of it.