£100k+ Inheritance advice

Paul_the_electrician

Hi there

I realise these threads come up quite regularly and i have done a search on them but everyone seems to have a unique situation

I would like to set out my position then say what i think i should do then if you would like to offer a critique i would be very grateful, thank you in advance

As title, likely to shortly receive a share of house sale of around £100-125K in around next six months or so

I am 38 Living with long term partner(36)
We are both self employed but work is regular and i like to think steady
2x 3.5 year olds
House in south east, worth around £480k
Mortgage of £185,000 at 1.74% 2 year variable with Santander, 1month in

No other debt at all, no major purchases on horizon

Income is around £40-45000 gross for myself and £8000 for my partner

We currently save child benefit into a LISA each at £65 per month plus other additions when we can afford it and have done since their birth

For the last 2 years and for the ongoing future, I save £1000 per month equally between S&S ISA/LISA(full allowance each year) and SIPP, and currently they hold around £30k between them
We also have around £35k in cash savings
We each have full NI record since being in work

Hope this is sufficient info

I have spent the previous 5 years aggressively paying down our previous property mortgage so we could buy a family house from a small bungalow

I realise that this has now been at the detriment of my S&S ISA and pension contributions, but its what we had to do to get the house we wanted, however the thought of putting so much money in the stock market in one go terrifies me quite honestly, especially as it seems it is at a late stage of growth cycle and feel i have missed the boat somewhat

I have a low LTV on my mortgage now and with the rate so low, think that paying this lump sum off the house would not really achieve a good return for my money, however with interest rates rising in the possible near future and stockmarkets having such a good run??

As we are both basic rate tax payers would an ISA be preferable to the Sipp.

I am so tempted to play it safe and pay the whole lump off my mortgage as the result is a known and immediate, and i am happy investing £1k per month for the ongoing future as on approx calcs this should give me a reasonable pot by 65 but such a large additional sum at once worries me

I would like to keep at least £20k in cash savings as we are both self employed and it would make me more comfortable especially with the upcoming brexit stuff etc

then spread the rest between all options?

ISA £20K
Open additional ISA for partner and add £20K
Full years Sipp allowance £40K
Remaining off the mortgage?

Any thoughts would be gratefully received

thank you paul

Fatbritabroad

Either is a good option but from a pure math the stock market is the best option. You could put all 120000 in between yourself your partner between sipp and isas and then invest the 1000 in a taxable account. Would looking at it this way help? You're paying 1000 a month into the stock market now. Thats 12000 a year and 120000 over ten years. Y ou could put 2000 a month in and pay it in over the same period but actually the longer it's in there the more chance it has to grow. I put a 42000 inheritance in the stock market in one hit a couple of months ago and the markets dropped since then but I'm not retiring for at least 13 years probably more. If the market is lower after 13 years somethings gone badly wrong

Paul_the_electrician

Fatbritabroad - Thank you for you perspective that is a good option too i never thought of, its good to know you have done a similar thing(you must have nerves of steel!)

would you suggest keeping the cash in a regular account whilst adding to the market at 2k per month

It seems crazy this is an issue im really bothered about, its a great problem to have i guess

Fatbritabroad

Paul_the_electrician wrote: »

Fatbritabroad - Thank you for you perspective that is a good option too i never thought of, its good to know you have done a similar thing(you must have nerves of steel!)

would you suggest keeping the cash in a regular account whilst adding to the market at 2k per month

It seems crazy this is an issue im really bothered about, its a great problem to have i guess

It's not crazy at all most people have never seen that kind of money in one hit unless they've sold property. I've always been interested in finance so I researched. Like anything the more knowledge you have the more confidence you have. I was agonising about starting to invest 5 years ago when I suddenly realised I'd been happily putting 12 to 14% of my salary into my pension. All through the financial crisis I'd never even thought about it. So if I was happy to do that why would I not also invest in a s and s isa. Its just the opposite kind of wrapper. You pay in via taxed income but anything made is tax free whereas pension is net of tax on the way in but taxed on way out. I therefore view my stocks and shares isa like my pension i. E. For retirement.
As you say my risk tolerance may well be higher I am similar age wuth a similar value house but a bigger mortgage 280k but I've fixed for ten years to allow me to invest. I also got 150k in pensions already and had 60k invested and I earn more than you so my situation is different. You need to be comfortable with what you choose not what i suggest.


Fwiw personally in your situation I would put a lump in your and your spouses isas (you can even pay this in over the next year if you like or say three smaller lump sums) why not keep say 10 to 20% for fun stuff?

I would also overpay the max on your mortgage say 18k as its on the edge of what I feel is affordable if interest rates go up (mine is just less than 3 times joint salary). Maybe keep another 20k to do the same next year?

The rest it depends on what you'll need it for? And when? if you're not going to use it for 10 to 20 years it will be eroded by inflation anyway so why not take some risk. Lock it up in your pension or put it in various high interest savings or national saving and investments and then pay it in again next year and the year after.


What would you do with the lump if the stock market tanked tomorrow? Would you pay it in or would you fear it was going to fall further? If so when would you invest? If you'd invest it anyway why not now?

Fatbritabroad

Ps reading the op again your pensions are way too low. I would Definitely top these up then continue paying in to them as you'll have previous years allowances to use up too (you can contribute 40k per year and use the last 3 years worth up). In your situation I'd top those up as much as possible. Your future self will thank you

Albermarle

then spread the rest between all options?

ISA £20K
Open additional ISA for partner and add £20K
Full years Sipp allowance £40K
Remaining off the mortgage?

It seems to me that you have analysed and weighed up the options quite well already . From this point which option is best is almost down to personal preference and risk tolerance . So what is the right answer for one person is not necessarily the right answer for someone else . For example some people would feel more comfortable with paying down debt/mortgage and some would take a more analytical view and invest more of it . However no point doing the latter if it gives you sleepless nights !

As we are both basic rate tax payers would an ISA be preferable to the Sipp.

There is plenty of debate about this .Assuming you invest in the same funds for each and the charges are the same , then there is still tax benefit from the SIPP but the money is tied up so again depends on personal circumstances . If you were a higher rate taxpayer then the paying as much as possible into a SIPP would be the obvious answer.

Paul_the_electrician

Fatbritabroad wrote: »

Ps reading the op again your pensions are way too low. I would Definitely top these up then continue paying in to them as you'll have previous years allowances to use up too (you can contribute 40k per year and use the last 3 years worth up). In your situation I'd top those up as much as possible. Your future self will thank you

Yes i am sadly well aware of my pension being low, I have only just started with it really, due partly to ignorance and partly my hatred of debt.

I know deep down i should pay the lump sum straight into the SIPP and ISA to get these up to where they should be but cant help the feeling we are overdue a big downturn in the near future.

I understand the logic behind it and the 20 odd years i have left for growth and recovery if any downturn should happen, also i have seen the growth i have benefited from with my contributions so far.

Also with the current rate on cash savings/bonds and the new tax rules and stamp duty on rental properties i cant see any other option for the long term except investment in equities or debt repayment.

Paul_the_electrician

Albermarle wrote: »

It seems to me that you have analysed and weighed up the options quite well already . From this point which option is best is almost down to personal preference and risk tolerance . So what is the right answer for one person is not necessarily the right answer for someone else . For example some people would feel more comfortable with paying down debt/mortgage and some would take a more analytical view and invest more of it . However no point doing the latter if it gives you sleepless nights !

There is plenty of debate about this .Assuming you invest in the same funds for each and the charges are the same , then there is still tax benefit from the SIPP but the money is tied up so again depends on personal circumstances . If you were a higher rate taxpayer then the paying as much as possible into a SIPP would be the obvious answer.

Yes i think i know i should invest this money, the sums all say so, and with quite a large
amount of equity in my house already i can benefit from lower rate deals

Maybe ill keep a good portion in my ISA, then if interest rates should creep up more quickly than everyone predicts i could use that to overpay when and if it makes it more worthwhile?

Fatbritabroad

Paul_the_electrician wrote: »

Yes i am sadly well aware of my pension being low, I have only just started with it really, due partly to ignorance and partly my hatred of debt.

I know deep down i should pay the lump sum straight into the SIPP and ISA to get these up to where they should be but cant help the feeling we are overdue a big downturn in the near future.

I understand the logic behind it and the 20 odd years i have left for growth and recovery if any downturn should happen, also i have seen the growth i have benefited from with my contributions so far.

Also with the current rate on cash savings/bonds and the new tax rules and stamp duty on rental properties i cant see any other option for the long term except investment in equities or debt repayment.

At least with pensions it'll be locked away in your sipp where you can't get at it? Or would you panic anyway and pull it all out in cash?

gallygirl

OP have you done a risk profile to ascertain your attitude to risk (your answer seems obvious but still worthwhile doing and there are plenty free ones out there).

If you decide you are not comfortable investing too much at present you could always put some in premium bonds and withdraw over the next year or so when needed for investment. Alternatively, invest some in low risk bonds and increase stock market exposure when you are comfortable doing so.

If you choose a mix of low cost index funds you'd be spreading your risk and you could look at mixed funds, eg Vanguard 80/20 with 80% in index funds and 20% in safer bonds.

For your cash, make sure all cash is in interest bearing accounts - there is a thread on the money board about them, fund as many as you can, splitting DD's between them if necessary. E.g. a NWide flex account lets you open at least two FlexDirect accounts which pay 5% for a year with 1k going through each account every month.

Not a bad problem to have though I assume sad circumstances behind it.

kidmugsy

Fatbritabroad wrote: »

from a pure math the stock market is the best option.

You can't possibly know such a thing unless you have a hotline to God.

The OP's caution seems perfectly reasonable to me: "it seems it is at a late stage of growth cycle and feel i have missed the boat somewhat" is probably roughly consistent with UK/US stock market history.

Of course if you want to argue that history should be ignored - on the grounds, for example, that the era of QE and ZIRP is unprecedented - then that leaves you with no case at all for saying that the stock market is mathematically the best option.

In the OP's shoes I might decide to make no dramatic decision until the question of remortgaging arises i.e. about 17 months after he receives the money. I might continue with the present policies of funding pensions and ISAs, and follow the suggestions of others of seeking to earn interest at higher rates than he pays on his mortgage.

Separately I might consider whether there would be an advantage in setting up my own limited company and working as a contractor rather than being self-employed. I think I might also persuade myself to read the personal finance pages in the Saturday papers, particularly for a few weeks after each Budget (the next one is due later this month), and at the transition of the tax years i.e. mid March - mid April.