Unexpected inheritance

Ash47

Recently I was bequeathed over £46,000. It was totally unexpected and I have been trying to work out what to do with it.

My partner and I are both working and our children have moved out. We have 9 years left on our mortgage.

At first we thought about paying the money into our mortgage (which is around £66,000) then we thought about putting it away until we retire. I'd like to split it between us and put it into 2 ISAs but I'm not sure what to go for.

I've been going round in circles trying to come to a decision to no avail, and would be really grateful for any advice.

Thanks

Dazed_and_confused

Cash (savings) ISA's or S+S (investment) ISA's?

Ash47

Thanks for replying. Because we've never had this sort of money before my partner is not keen to risk it so he thinks a savings ISA is better. I'm not sure about the investment one - would there be any way we'd lose what we put in? Sorry to be so clueless

Dazed_and_confused

An ISA is just a tax wrapper so yes, you could lose money if you picked the wrong investments.

With a (genuine) cash ISA your capital should be safe but you risk "losing" money in the sense that you will earn less in interest than inflation. So over time your £46k will increase due to the interest but be worth less in real terms due to the effect of inflation.

xylophone

Had you considered making additional contributions to your pensions?

DiggerUK

Reduce the mortgage. If you then carry on making the same mortgage payments as now you will be mortgage free in a little over three(?) years.

Use that time to figure out what you will then do with the spare cash. Best of fortune..._

kazwookie

Pay off the bulk of the mortgage, get it gone, then save.

Newly_retired

Pension contributions, increase your mortgage payments, savings.

Interest generated by cash savings is free of income tax up to £1000 pa so you can probably find a better rate of interest outside of an ISA.
Check on this site.

Brilley

..if your mortgage interest is higher than any "savings" rates surely it is a no brainer to pay off the mortgage?....no investment risk. The money you "save" by not paying of your mortgage could then be used to fund a SIPP?

Notepad_Phil

Ash47 wrote: »

Thanks for replying. Because we've never had this sort of money before my partner is not keen to risk it so he thinks a savings ISA is better. I'm not sure about the investment one - would there be any way we'd lose what we put in? Sorry to be so clueless

With most interest rates on savings accounts paying less than inflation you are almost guaranteed that you will lose money if you put it into savings - i.e. although the sum will increase by the interest rate, the amount it can buy will be less due to inflation.

It is true that investments can fall, but provided you are invested in a diverse manner and for the long term (i.e. 10 years plus) then it is likely that you would be in a better position than if you had been in an average savings account.

Perhaps you could pay down the mortgage and use the monthly sum saved to put into your pensions.

george4064

Brilley wrote: »

..if your mortgage interest is higher than any "savings" rates surely it is a no brainer to pay off the mortgage?....no investment risk. The money you "save" by not paying of your mortgage could then be used to fund a SIPP?

You are not wrong, however by ploughing more money into the mortgage does effectively forgo the opportunity to put more into investments held in either a pension or an ISA. This is because to withdraw some cash from your house requires a lot of effort and cost (via equity release), whilst withdrawing cash from a savings account/notice account/whatever is most suitable savings accounts is a lot easier and hence can be invested more quickly.

An example where this would be useful is in this scenario: Imagine if there had been a big market crash, and the ftse all world had dropped by 50%. That would be a very good time to buy shares/units in a FTSE all word ETF/fund, despite mortgage interest rate is 2.0% and general savings rate is 1.5% in this scenario the odds of the stock market beating both of them is very likely over the medium/long-term. So if the money is locked up in property it is very inaccessible compared to if it was in a savings account, and hence the opportunity of investing in the market when share prices are low would be lost.

TLDR; sometimes its best to keep flexibility by saving money in cash rather than overpaying the mortgage as much as you can because you limit your options in a market crash and hence shares are available on the cheap.