Lump sum inheritance - how to put to best use to achieve early retirement?

savingstortoise

My mum very sadly passed away suddenly a couple of months ago.  It appears that I am due to receive an inheritance in the region of £600k once some small liabilities and IHT are taken care of.  The bulk of her estate is in her old house which is to be sold and the above amount is on the conservative end of the scale based on her house selling for probate value; the sale sum is likely to be higher though.   

I am aged 47 and married - husband is 51.  We have 2 primary school aged children, at local state primary.  I work in tax for an accountancy firm in Central London and I was promoted earlier this year with a good pay rise.  My take home pay is £4,500 per month and husband's take home is £1,500 per month.  My husband started a new self employment a couple of years ago after running a small business for a number of years which ended up losing a lot of money but he has worked really hard and paid off all his debts and is now in a position to save.   Because the now-closed business was struggling I had to carry all our expenses for several years, including renovations to our home which needed a lot of work when we bought it, and was also helping to support my mum, so had little opportunity to save until recently hence the embarrassingly low savings in the context of my salary.  However I have now built up an emergency cash pot of £20k.  I also have DC pension savings of £120k across 4 pots from current and previous employers.   My current employer has a sal sac scheme which I use and I contribute 3% of my salary and they top up with a further 5%. 

The house is on a repayment mortgage of £1,600 per month and we have after school and holiday childcare costs that work out at £950 per month.  Assets and liabilities are as below:

Assets
- family home £850k approx (purchased 2013 for £430k, just before prices in our area leapt up) subject to mortgage
- emergency cash savings £20k
- pension pot £120k
Liabilities
- mortgage £250k (repayment on 5 year fix with term due to come to an end on 30 Sep ie about 3 weeks or so!)
- car finance £150 per month for 2 years (3 year deal taken out last Oct) then either buy car or trade in
- £10k on 0% loans

I had expected that I would not be able to retire until 67 at the earliest as I would need carry on until then and save hard to build up my pension pot and help kids through higher education etc.  However, this lump sum will make a huge difference and I would like to retire earlier if I can, maybe at 60 if not sooner.  My husband will carry on working in some shape or form as long as his health allows.

I have looked at our 'number' and, after removing childcare and mortgage costs, car finance and credit card debt and general child related expenses like sports clubs, music lessons etc which will not longer be in point by age 60, we think we could live very comfortably on £36k per annum.

I had originally thought of paying off the mortgage as a first step with the inheritance but, having had a good read through the forums, was thinking maybe of taking an interest only mortgage and putting the capital to work instead to pay it off at a later date say age 60.  I would like to get the mortgage down to £200k so would like to pay off some of it though.

I am thinking of doing the following and would be really grateful for any thoughts or advice.

- Pay off car loan and just keep car until it doesn't work any more!  It is a small economical car, I get over 350 miles on a tank and the build quality is good, I really love driving it and would be happy to keep it until it falls to bits.  

- Pay off credit card debt

- Pay off £50k mortgage and keep balance on interest only deal

 - Put 6 months to a year's emergency cash on easy access NS&I accounts or premium bonds or something like this.  Say around £50k.  Maybe more in cash as a hedge in current climate, possibly £100k.

- Up my work pension sal sac contributions to max out my current year annual pension allowance if I can combining my own and employer contributions.  If possible I will make AVC contributions via the scheme to max out my earliest previous year's unused allowance.  I know that AVCs can be made and which my employer will also make contributions for AVCs, but I am not sure if there is a cap on how much they will contribute or how much I can contribute and I am looking into this.  I would need to use some of the inherited funds to make the AVCs but not sure at the moment how much as this will depend on how much employer will pay in - if they won't pay in I would clealry need to invest more)
- If I can't make sufficient contributions via work scheme to max out current and previous year allowances, open a SIPP and make contributions to that to max out my current and earliest previous year's unused allowance.
 I was thinking I would contribute like this for the current year and following 2 years to exhaust unused previous years allowances (I know you can use 3 previous years - so for current year 20/21 I would use exhaust 20/21 allowance and 17/18 unused allowance, for 21/22 I would exhaust that allowance and use 18/19 unused allowance and then exhaust 22/23 allowance and use up 19/20 allowance.  
I would then look to max out my contributions for next 12 years up to age 60.  I would expect to get a tax repayment of any higher rate relief for payments in a SIPP so would use those to help fund pension contributions for future years (clearly the sal sac contributions would attract relief at source so no refund due from those).
Husband is very suspicious of pensions as his dad lost a lot of money on an Equitable Life pension and this has had quite an impact in father - in - law's retirement.  However I am trying to persuade him that they are a very tax efficient way of saving and that the Equitable Life risks don't apply to DC pensions - am I right?

- Contribute £20k to S&S Isa for next 12 years (making total of £120k).  I could also look to do a S&S Isa for my husband each year for the same amount.  Leave these to grow.

- set up Junior Isas for children and contribute monthly.  Where to keep the lump sums that would feed the ISA contributions for us though?  Premium bonds for money needed in shorter term and investments for money needed later down the line?

- Contribute any remaining lump sum to investments in low cost global tracker (I have read about  an HSBC Global ETF which seems to be preferred to some of the Vanguard funds for a lighter UK weighting) and leave to grow again until I am 60.  I am not sure whether toput in th elump sum or drop fees - drip feeding feels better instinctively but I appreciate may lead to a lower return.

I need to work out what to do with the mortgage asap so I can get a new deal in place by end of month if possible or asap after that.  Realistically the house will not be sold for a little while yet so I can't pay any of the mortgage of fnow.  I am thinking of trying to get a 5 year interest only deal, and then pay £50k at the end of the 5 year term.  I woudl then keep trying to get 5 year deals as long as interest remains at low rates - otherwise I will just realise investments and pay the mortgage off.  If however doing the interest only plan is not a sensible idea, I will just get a 2 year repayment deal and then pay off the whole mortgage after that.  However this would of course affect the plans for investing elsewhere.

Any thoughts?  Sorry this is a bit of a stream of consciousness, in truth I am slightly overwhelmed at the numbers in question as I wasn't expecting mum's Estate to be anything like the size it is.  Based on a 3.5% SWR I would have thought we would need to have access to pots totalling just over £1 million by age 60 on the basis of surviving until 90, does that sound right?  

Any help much appreciated

cloud_dog

Gosh, there's a lot of information here, not something we usually find 

Just a couple of initial thoughts...

House/mortgage - I might be tempted to pay this off.  I know the conventional wisdom would be to invest more due to low interest rates etc but, with your DH being self employed, and only relatively recently, paying it off would de-risk it and bring a degree of peace of mind, additionally with all (the vast majority) of the inheritance being outside of tax efficient wrappers you are likely to incur more taxation of your investments/savings until you can move them in to ISAs/pensions etc.

Pension - With you benefiting from Salary Sacrifice and with you only having a pension pot of £120k (is this yours or combined?), I would be tempted to maximise Salary Sacrifice and sacrifice as much as I can to contribute via your employer £40k per year.  You could use some of the inheritance to supplement the reduced income.

savingstortoise

@cloud_dog thank you so much for your thoughts.  I’ve seen quite a few posts from people asking for input, where replies say they haven’t put enough, so I thought I’d better give as much as I could upfront!

Yes I do plan to use as much of my salary as I can to max out the pension contributions to the e’er scheme, there may be limits to how much I can put in under the scheme rules but I am looking into it.

The £120k pot is mine (husband is very suspicious of pensions after his dad list a lot of money with an Equitable Life pension), using up current year and previous year unused allowances over the next couple of years should bump it up a bit and I will put in the max £40k for the following years via the Sal sac if the scheme will let me put in that much.

Clive_Woody

If it were me I would probably pay off the mortgage for peace of mind, then with the money freed up from regular mortgage payments max out annual pension contributions. Say £40k for the next ten years, plus your current pot of £120K ,with reasonable investment growth you're going to be looking at a decent pension pot by the time your're 57, more if you stay working for a few extra years to top of off even more.

A decent cash fund in something like Premium Bonds would serve as an emergency pot. I would then max out your ISA contributions (and hubby) each year and let that grow so you have a decent ISA fund when it comes to retirement so you can balance withdrawals from pension and ISA.

I'm sure an IFA or many of the folk on here can come up with more elegant solutions, but I guess it depends on your attitude to risk, interest in planning your own investments within the Pension and ISAs and how comfortable you feel with financial planning over the years to come.

Best advice I would say is don't rush into anything, the mortgage could tick along for a couple of month on SVR or whatever you go onto once your deal ends. This is a once in a lifetime opportunity so have a moment to think and raise a glass to your mum.

Albermarle

Regarding the pension . I am sure your scheme will allow you to put as much as you want in . The issue is that there are HMRC limits to stop people overexploiting the tax relief benefits and the limit is £40K pa . Although unused allowance over the previous three years can be brought forward as long as you sufficient income to cover it. If you do not already do so you will need to look at  your investment strategy with your pension and see that it fits with any non pension investments .
The £120k pot is mine (husband is very suspicious of pensions after his dad list a lot of money with an Equitable Life pension),
equitable life issues do not affect your DC pension pot at all.
Contribute any remaining lump sum to investments in low cost global tracker (I have read about  an HSBC Global ETF which seems to be preferred to some of the Vanguard funds for a lighter UK weighting)
I think you are getting trackers and multi asset funds mixed up . Perhaps some more research needed or you could benefit from speaking to an IFA ?
Based on a 3.5% SWR I would have thought we would need to have access to pots totalling just over £1 million by age 60 on the basis of surviving until 90, does that sound right?  
Yes a Million Pound pension pot/investments at a medium risk level should produce around £35K pa inflation linked. If markets are positive , you could well have a lot  of the Million left when you are 90 .
However if you have lots of other savings + two state pensions , you will be not so reliant just on the invested money anyway.

Bobziz

So your husband will carry on working until his health goes ? I hope he enjoys his job

I'd work hard on persuading your husband to start a pension, and even make contributions into it yourself if I were you. Good to have the flexibility that and ISA affords, but make good use of his pension benefits too.

Gary1984

Sounds like you have a good plan with upping the pension payments to benefit from employer contributions and salary sacrifice. I also much prefer your plan of going interest only on the mortgage rather than paying it off right away. Interest rates are so low and with your LTV it seems likely you would be in a better position in 10 years time by investing the money in a low cost global tracker instead than paying off a debt with an interest rate of around 1.5%.

I expect you could probably retire at 57 rather than 60 with your current plan if all goes well in the mean time, especially if you would consider moving somewhere cheaper when the kids leave home. 

barnstar2077

Although I would normally not advise it, it is such a large sum of money that I do think that I would pay the mortgage off too.  Then top up pensions and max out ISAS as has also been suggested.  I don't think you need an IFA for that.

OldBeanz

As someone whose father had a long term mortgage who ended up on a fix rate of 3% when everyone else (including me) was paying 8-10%; while my mortgage for most of its last 8 years (5 past retirement) with Santander ended up them paying me 2%+ to lend them back their money; therefore not an advocate of mortgage free wannabee, I would pay it off and be done with it.

tacpot12

Another vote for paying off the mortgage. This is probably going to be less efficient than investing your inheritance, but you don't know what will happen to either mortgage rates or investment returns, and the knowledge that nothing can happen to cause you to lose your home is immensely reassuring. 

crv1963

Given the sums involved I too would pay off the mortgage, the peace of mind, especially for cautious husband is priceless. I'd also look to max own and husbands pension contributions while the income is good. Look to the tax position in retirement, if Husband has income below his allowance it is wasted apart from a small portion he can gift you. We're piling money into my wifes pension pot so we can use up her tax allowance when we retire. Also look to when you plan to retire- maybe it will be before 60? I'm 56 and very aware that I'm trading time doing the things I want and enjoy for money by going to work- in a job I also enjoy but have to be there when I'm told to be - aka shift rota!

I'd look to start a pension for each of the children, 10 years contributions totaling £36k will sit and grow with some big ups and downs over the years. Maybe a bit put away for when they can access it at 18 years old? No one knows the future but having a bit of cash at 18 (even if then spent on having a good time) and something that will grow until they reach retirement is probably a good investment.

There is no rush, we've used an inheritance -not such a large sum- to complete building work and are planning further work before finally retiring. I'm with you on the car to, if it is what you like and reasonable costs to run then don't change it until you need to.