Options for £25k inheritance

Rowbo

Hi all,

We are due to receive an inheritance of approximately £25k sometime over the next few months. I wanted to just run some ideas past you all to see what you think our best options are - Other than blowing it on a trip to Disney or buying a camper van obviously!

Just some background first. We are a couple in our early 40s. We have two kids aged 13 and 11. We have 97k left on our mortgage (13 years left to pay. 1.79 rate) with our house being worth approximately 350k. One main salary (66k) and one smaller salary (5-6k) which pays for holidays. We currently save around 22k a year into pensions/lisa/investment isa. However we have only been saving at this level for a few years so our total comes to about 100k at the moment. We have an emergency fund of 5 months expenses in premium bonds. We’d like an early retirement.

So, options that I can think of:
1. Put into husbands pension taking advantage of the 40% tax bracket.
2. Put into an investment isa to help cover the early retirement years before pensions kick in.
3. Put into some kind of savings account to keep it safe for kids uni fees.
4. Pay it off the mortgage meaning we’d save approximately 5k in interest and reduce the term by 4 years.
5. Use it to start some kind of pension for wife.

We’d love to hear what you think & what you would do.
Thank you

Dazed_and_confused

1. Seems a sensible option but unless he is Scottish resident for tax purposes and has other taxable income in addition to his salary paying it all in in one tax year may be the most tax efficient option.

2. Have you compared against 1 to see which is more tax efficient overall?

3. Given their ages this is a tricky one. Savings will lose money in real terms due to inflation. Investment has the risk associated with it being a fairly short timeframe.

4. Psychologically good but maybe not the best use of the money given the low interest rate being paid on the mortgage.

5. She could get basic rate tax relief but will she up being liable to tax in retirement irrespective of any fund she builds up this way? If she will then this doesn't look as tax efficient as option 1 could be. Might be different if hubby expects to be higher rate payer in retirement.

Albermarle

My vote is for 1, especially if he will be a lower rate taxpayer in retirement.

Regarding 3. - you need to read up about Uni fees/student loans . From a financial point of view it is almost always better to pay the fees using a Student Loan and the same for the basic living expenses .
You will have to help them out as the basic living expenses loan is far from adequate . Typically you could end up paying for accommodation for them but fir the rest it is better they take out a Student 'Loan' which is not a loan at all in the normal sense of the word .
https://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes/

steampowered

I would put a good chunk of it into a S&S ISA earmarked to help the kids with university living costs, and the rest into a pension.

A pension is the better option financially given that hubby is a higher rate tax payer but wouldn't be available to help the kids until they are in their 30s.

On a separate note, you say that you want to retire early but it sounds like you have only recently started a pension. If this is the case there could be a big gap between your expectations and reality. Do use some online pension calculators to estimate what you might need to contribute into a pension each month to be able to afford a decent standard of living in retirement based on different estimated retirement dates.

Rowbo

Thank you all for your replies. Sounds like the pension is the best financial option. I’m going to need to do some reading up on how we would pay this in.

Thanks for the link on student costs. I will have a good read of that. I thought the same about doing it through student loans but I’m sure I saw a calculator this week on the site somewhere that suggested we’d need to pay 12-14k ontop of what they could get. It was a very quick look though so I may have it wrong. I will do some more reading.

We’ve been paying pensions since starting work in our 20s but just not much. Our total pot made up of husbands DC pensions, wife’s DC pension (tiny), LISA and paying monthly into an investment isa, comes to about 100k right now. It’s just that we’ve only started saving a good amount into them over the last couple of years. We also have a DB pension of 7500 when husband reaches 65 years.

I also quite like the idea of splitting it between the pension and the isa.

Thanks again!

NedS

The 40% tax relief is an obvious attraction for putting into husbands pension, and may also reduce his income to the point where you can also claim child benefit again, so if he is not already doing so, he should be making substantial annual contributions.


But don't overlook building up a decent pension for the wife. Although the wife is not a tax payer at the moment, she will still get 20% tax relief on contributions up to the limit of her earnings and this may likely be mostly withdrawn tax free in retirement, especially if you plan to retire early. Fully utilizing both of your tax free allowances in retirement is not to be underestimated.


You could use the inheritance to fund additional pension contributions over the next 5 years if that works out more tax efficient - doesn't have to all go in this tax year.

AlanP_2

Rowbo wrote: »

Thanks for the link on student costs. I will have a good read of that. I thought the same about doing it through student loans but I’m sure I saw a calculator this week on the site somewhere that suggested we’d need to pay 12-14k ontop of what they could get. It was a very quick look though so I may have it wrong. I will do some more reading.

I haven't seen the article / calculator but I'd be wary of relying on it too much.

Our 3 children have all been through Uni (one up to PhD level) and to be honest it hasn't cost us much.

They have had loans (across all different schemes as 8/9 years age range) and we had to help out a bit but nothing like the level you referenced.

A couple of caveats:

They all worked in 6th Form and through Uni holidays so had their own money saved before they went and topped it up regularly.

They all got £3k a year for 3 years from their Grandparents which they really appreciated (we would have had to add more if they hadn't got this).

The 2 boys were (are!) cheap to run, my daughter less so as she needed more shoes / clothes per year than the boys purchased in 10 years (my 28 year old wanted a new dressing gown for Christmas to replace the one he got when 14, and the girlfriend of the older one forced him to replace 10 years old T-Shirts and Hoodies last year - but couldn't persuade him to replace his favourite climbing trousers that his Nan has patched and repaired 4 times in the last 15 years).

steampowered

Rowbo wrote: »

Thanks for the link on student costs. I will have a good read of that. I thought the same about doing it through student loans but I’m sure I saw a calculator this week on the site somewhere that suggested we’d need to pay 12-14k ontop of what they could get. It was a very quick look though so I may have it wrong. I will do some more reading.

Tuition fees are fully funded by the government. Students get a very cheap loan to cover that, and only have to repay it out of 9% of income above £25k (a bit like higher rate income tax). The system is designed such that 80%+ of these loans never get repaid, so it would be mad to pay the fees in cash.

The issue is that students do not get loaned enough to cover their living costs, so parents need to top them up to be able to live. That is what the MSE article is talking about - nothing to do with tuition fees.

However, the system has fundamentally change every couple years. The system is still a mess and there is a very high chance it will have changed again by the time your kids get to uni age, so I wouldn't read too much into it.

monaymadlol

66k salary! Winning! What are your jobs?

Mick-H

4 all the way, knocks time off your mortgage, meaningg you can start to save for other options earlier.
Saves you 5k so your 25k in theory becomes 30k.