Advice sought on what to do with £1.2m pay out

me107

Please excuse the very long post.

I would be grateful for some advice on how to manage a large compensation payment that I have received to the sum of £1.2 million. This was for a very serious injury I sustained a few years ago, which has left me a wheelchair user.

I am intending on paying for some independent financial advice. But before I speak with an advisor, I thought it would make sense to canvass opinion on this forum (I am a long-time lurker), so I have some ideas to consider/compare against the IFA advice.

I will give some financial details below, and some of the ideas that I already have. Grateful for any thoughts or comments. There are a lot of thoughts/questions, so apologies in advance.

• 36 years old, married, with two small children.

• Home-owner with outstanding mortgage of approx £103,000. Approx house worth £480-£500,000.

• Working full-time. Salary of approx £63,000.

• Civil Service Alpha Pension with a contribution rate of 7%.

• Wife works part-time, earning £600 a month, so not paying tax. She has no pension.

• I receive PIP to the sum of £350 a month for my disability,

Existing savings before compensation taken into account:

• £17,000 in cash savings (premium bonds and Marcus)

• £8,000 in S&S ISA (held with Vanguard, all in VL80). I add £850 a month to this via dd.

• No other outstanding debts, other than a credit card which I clear in full each month.

• Junior S&S isa in VL80, with approx £5,000 in, adding £50 a month via dd.

My initial thoughts are that I would like to pay off my mortgage as soon as possible. I am aware that, with rates so low, this might not be the best option, but I think I would value the peace of mind that it is cleared.

We are considering a house move. Ideally, I need a bungalow, with some modifications, so I am willing to allocate approx £400,000 to this (so property in region of £850,000). However, we are not sure when we will move. It is likely to be within the next 6 years, but not guaranteed. Could be sooner, might be later. Not sure where is best to hold this sum given the variable time span. Any thoughts welcome.

I would also like to assist my elderly parents by giving them £100,000.

That would leave approx £600,000 which I intend not to touch for the time being. With the mortgage paid off, I have calculated I could also save an additional £1,000 a month on top of this.

I feel I need to keep a reasonable sum in cash, to pay for equipment etc, and probably more in cash than an advisor would recommend. I was thinking £200,000 probably in premium bonds and across several accounts.

The rest I am happy to lock away for longer, potentially to cover care costs later in life. I plan to try and continue working for as long as possible. But my disability and health might mean that I have to retire in my early 50s – maybe even sooner.

I imagine that an advisor will suggest stocks and shares, so I guess this is the bit I am after the most advice.

I have only recently started to invest in S&S. I have been investing in VLS80, which I am aware is quite high risk. I have felt comfortable with that to-date as I have been pound cost averaging. I didn’t panic during the COVID dip and stuck to my strategy. However, that is a lot easier when you only have a small amount invested. I am not sure how I would feel to watch a portfolio of £300,000 lose 40% in value, so I may have over-estimated my appetite for risk. A more modest 60-40 split might be something I am more comfortable with. Psychologically, I feel more comfortable investing a lump sum in a pension, as I know I have to leave that until I am at least 55. That is sort of irrational though, as I could simply leave a lump sum invested until I was 55 in a S&S ISA.

Key things I would welcome thoughts on are:

How best to minimise exposure to tax? Should I hold a lot in my wife’s name, as she doesn’t currently pay tax and is about £6,000 off the threshold for paying it? If so, any recommendations on how much. (I trust her).

Pension advice – Should I overpay into my fairly generous civil service pension (not sure how overpaying this works), or start a SIP, or both.

Any thoughts on SIP or S&S ISA providers, given the potentially large amount I may deposit and build over the next 20 or so years.

Any thoughts on investments? I am generally looking to invest in low-cost trackers. I am not against active funds, and would consider a mix of the two, but I think I would need good reason to pay for an active fund.

Number of funds to hold and asset allocation. I think I am comfortable managing this myself but would want to take a relatively hands-off approach, prob looking to rebalance 1-2 a year, so I feel it makes sense to hold a smaller number of funds and leave things alone.

Should I use £40-50,000 to invest in a buy to let? Not sure I can be bothered to be a landlord, but my wife seems keener. I am attracted to the idea for reasons of diversification.

Any thoughts on the above would be welcome. And apologies for the long post.

colsten

You seem to have a good grasp on your finances, and I think your plan to consult an IFA is just the right thing to do.

Items I feel need addressing are as follows, but a decent IFA will cover all those plus more:

1. a will if you haven't got one yet, and estate planning
2. your wife's pension 
3. your, and your wife's, state pension
4. investments for both your kids (it sounds as if there is only 1 JISA?)
5. education for kids (uni fees etc)
6. early retirement options for yourself and for your wife
7. critical illness cover and life insurance

me107

colsten said:

You seem to have a good grasp on your finances, and I think your plan to consult an IFA is just the right thing to do.

Items I feel need addressing are as follows, but a decent IFA will cover all those plus more:

1. a will if you haven't got one yet, and estate planning
2. your wife's pension 
3. your, and your wife's, state pension
4. investments for both your kids (it sounds as if there is only 1 JISA?)
5. education for kids (uni fees etc)
6. early retirement options for yourself and for your wife
7. critical illness cover and life insurance

On point 7, I forgot to mention I already have life insurance, as does my wife, although not critical illness. I took this out a year or so ago to cover the outstanding mortgage (as I didn’t know I was getting a pay out). Due to my various health issues, I couldn’t get critical illness at the time. And life insurance was v expensive. 

Do you feel it is worth getting more? I sort of feel as I have a large pay out I don’t need this as much. I pay £22 a month for the life insurance, and the payout to my wife would be around £120,000 if I die. I was thinking of cancelling this given the pay out.

Grumpy_chap

Sorry to hear about your accident, but you sound to have yourself in good order and the compensation will now assist.

I think the first thing is to understand whether this sum of capital will affect any other benefits or income.  Same for any plans you have for the income.

Your idea to pay off your mortgage seems prudent.  It may not generate maximum return given low interest rates but it is good for 'resiience' and peace-of-mid as you say.

Given you say you "can't be bothered" to be a landlord, I would suggest that buy-to-let is not for you.  I understand the diversification aspect, but there are ways to diversify and include property by taking shares in property funds that don't require the hands-on input of being a BTL landlord.

I am intrigued by your suggestion to give £100k to your "elderly" parents.  Given that you are only 36, how "old" is your "elderly"?  My understanding of these compensation payments is that they are usually determined on the basis of extra costs you will incur because of the injury and / or earnings deprivation.  If that is the case, it would seem counter-intuitive to pass funds up a generation.  I understand the empathy behind giving something to your parents but do they need / what will they actually do with the money?  If your parents are sufficiently comfortably off (not rich) then they might well not really spend the money but just end their lives with an extra £100k in the bank over whatever they would have had anyway, which will become subject to IHT and then the balance split in whatever proportions they wrote in their will - you might even find a slice makes its way back to you.

My best advice, though, is that I have zero experience of this and you really do need to ignore my thoughts if the financial advisor that you are going to get on board has better or conflicting advice.

colsten

me107 said:

colsten said:

You seem to have a good grasp on your finances, and I think your plan to consult an IFA is just the right thing to do.

Items I feel need addressing are as follows, but a decent IFA will cover all those plus more:

1. a will if you haven't got one yet, and estate planning
2. your wife's pension 
3. your, and your wife's, state pension
4. investments for both your kids (it sounds as if there is only 1 JISA?)
5. education for kids (uni fees etc)
6. early retirement options for yourself and for your wife
7. critical illness cover and life insurance

On point 7, I forgot to mention I already have life insurance, as does my wife, although not critical illness. I took this out a year or so ago to cover the outstanding mortgage (as I didn’t know I was getting a pay out). Due to my various health issues, I couldn’t get critical illness at the time. And life insurance was v expensive. 

Do you feel it is worth getting more? I sort of feel as I have a large pay out I don’t need this as much. I pay £22 a month for the life insurance, and the payout to my wife would be around £120,000 if I die. I was thinking of cancelling this given the pay out.

I am afraid, I cannot really assess whether you have enough life insurance cover - an IFA will be able to advise based on all the detail and the needs of yourself and your family. All I can say that I feel your wife might be in a vulnerable position if she has no pension to speak of and just £120k potential life insurance, with a low-paid part time job and 2 children, and possibly a mortgage. BTW, has she got life insurance? How would you and your children cope (financially) if she was no longer there? Could you continue your job, would you need to pay for home help, child care etc? Sorry if these are somewhat morbid considerations but it's important to cover all bases. You don't have to answer here. Just put it on your list for discussion with your wife and with your IFA.

jamesperrett

I would definitely consider starting a SIPP (or similar private pension) which could help to cover the period between age 57 (or whatever it is at the time) and your normal pension age. While you may currently have no plans to retire early, having a private pension as well as the civil service pension will give you added flexibility.

DiggerUK

The trauma of what you have been through is obvious from your post, you seem to believe all will be sorted out by simply sorting things out. Slow down.

Clear the mortgage, you can do that yourself in short order and it's a major change. After that I see you being more settled in a new home that fits your needs, you deserve it and it's a substantial project that will keep you and the family occupied.  

Your altruism towards your parents is admirable, but I have to say it is misplaced. I feel you should prioritise yourself and your family.

Cash holdings of £200k in PB's with four family members is a safe place for now. NSI could soak up the remainder.

I think the days of buying such things as added years to CS pensions are long gone, you would be going in to the world of DC pensions that means 'you may not get back all you pay in". There are also  a few pennies to be gained by transferring some of your wife's unused tax allowance to yourself.

I have a poor opinion of the financial adviser industry, there's nothing you can't find out or figure out for yourself.

I would suggest you get all funds somewhere safe and get on with sorting out your new home. That will give you plenty of time to figure out what to do with remaining funds. 

Don't forget, your pulling down a good pay packet, money is the least of your problems given what you have been through. Best of fortune..._

ladyholly

Obviously I dont know if your injury could cause more problems as you get older but I would say be aware that it could happen and your support needs could change e.g. needing carers to assist you, further adaptations to your home etc. These will all need to be paid for and they dont come cheap.

me107

ladyholly said:

Obviously I dont know if your injury could cause more problems as you get older but I would say be aware that it could happen and your support needs could change e.g. needing carers to assist you, further adaptations to your home etc. These will all need to be paid for and they dont come cheap.

Yes, thanks for this. It is a good point. I am young and relatively healthy now, but as I get older am likely to need greater care.

Albermarle

We are considering a house move. Ideally, I need a bungalow, with some modifications, so I am willing to allocate approx £400,000 to this (so property in region of £850,000). However, we are not sure when we will move. It is likely to be within the next 6 years, but not guaranteed. Could be sooner, might be later. Not sure where is best to hold this sum given the variable time span. 

Normally on this type of time scale for a house purchase, it would be recommended to keep this in cash. If you place it with NS&I , then there is no compensation limit issue. However it would then beg the question would you need to keep another £200K in cash as you plan to do . You will end up paying tax on a lot of the interest on such large sums .

Psychologically, I feel more comfortable investing a lump sum in a pension, as I know I have to leave that until I am at least 55. That is sort of irrational though, as I could simply leave a lump sum invested until I was 55 in a S&S ISA.

Probably the choice will be more driven by other issues. With a pension you can gain some tax relief and probably some at 40% for you . Even if you pay tax on the way out there will still be a significant benefit but there are limits of how much you can add each year. A S&S ISA means max £20K pa to invest . You may have to look at unwrapped investments , which means more admin ( unless the IFA does it )

Regarding providers , if you stay with mainstream providers the danger of losing your money etc is minimal. Much safer than leaving it in a bank ( as banks lend money to people who might not pay it back )

 so I may have over-estimated my appetite for risk. 

Quite a common thing to do. 

unkle

An IFA is a good idea, but think you also need to make some decisions yourself as to the likely future need.
1. If you think you may have to retire early (i.e. before you can draw a pension which I assume is 57) then look at alternatives to simply increasing your pension. Topping up your and your wife's ISA's each year to the maximum £20k may be somewhere to start.
2. Start a pension for your wife. You want her to at least have the amount per annum equivalent to the personal allowance. There is no point you paying 20/40% tax of some of yours in future and your wife not being a tax payer. You can pay her fully salary into a SIPP per annum.
3. This may sound harsh, but following your injury is your life expectancy reduced? If so, again, your own pension may not be the best investment to top up.

For now, personally I would be looking at £750k in NS&I, if your mortgage rate is greater than what you can achieve else where pay it off. Top up ISA's, start a pension for your wife, and speak to an IFA.