Another Investing what would you do - But with Inheritance

funkyfin2000

Hi All,

Looking for a little support on how best to invest some inheritance that myself and my wife have come into/coming into. Again, totally understand that we should take professional advice, which we will, but looking at general guidance given the situation we are in and thoughts on what I think is the right thing to do - I know it depends on appetite to risk and what we want to achieve etc.

Essentially, we have come into a £20k lump sum of money - and then with an impending house sale, it's likely we will have around a further £170k cash available to us.

We are married, aged in our early 40's and have very little debt, bar a mortgage and cars on HP/Lease. (No OD's/No Credit card debt etc)

We both have private pensions - I'm earning around £70kpa, wife less than £10kpa. We have 2 children both under 11.

The 2 children both have ISA's which we top up at £100 a month each. One is in in a BMO Child Trust Fund ISA - worth around £20k already and the other in OneFamily Ethical Junior ISA and around £8k total worth. Both performing OK - the BMO performing the best generally as it's a riskier portfolio. Would like to consider moving the OneFamily one for something a bit riskier as it's lagging a little.

Alongside that, we have a Vanguard Life Strategy 60% with just over 10k in (which is part of my ISA allowance)

We don't have anything in my wife's ISA's. Aim would be to try and reduce our monthly outgoings a bit if possible, have money available to us for some bigger holidays (if COVID allows!) in the future and potentially buy our own cars in time so we don't have to lease/HP. Alongside that, it would be good to invest more for the children for their future as adults and also invest a bit more for us out of retirement as well.

Our thoughts were as follows:

1. Max out our Cash ISA's and use those for dipping in and out of for holidays - they could be topped up with our own disposable income/bonus etc at the end of each year. The £20k mentioned above has already been put into my wifes ISA for this years allowance - but probably stick another £20k in next year in April out of the £170k cash.

2. Max out the Vanguard LS product, can add another £20k from 1st April and a little bit more in it before then if house sales pulls through before April.

3. Max out the children's ISA's as well next year and then save £200 a month off our outgoings

4. Overpay the mortgage (5yr fixed for another 4 years currently) so can over pay 10% every year without penalty and rather than reduce monthly outgoings, reduce the term, as that maxes the amount of interest reduction we would pay. Do that over the next 4 years.

5. Maximise pension payments for my work - as employer matches them - so i can increase the payments i make upto 5% i think, which will be more tax efficient for me and also mean I save more into my pension and get more from my employer.

6. We would have probably about £50k left after all that - possibly buy a car or two or invest in something else maybe? OR use it to keep paying off the mortgage each year.

Any thoughts welcome - or if you need more info, let me know - appreciate anything anyone has to offer.

dunstonh

5. Maximise pension payments for my work - as employer matches them - so i can increase the payments i make upto 5% i think, which will be more tax efficient for me and also mean I save more into my pension and get more from my employer.

Actually you can pay more than that in and it could well be one of the best options.

2. Max out the Vanguard LS product, can add another £20k from 1st April and a little bit more in it before then if house sales pulls through before April.

I assume you mean ISA as that is the only tax wrapper limited to £20k.  The GIA has no limit and the pension can see you contribute potentially £150k or therebouts.     ISA is less tax-efficient than the pension but it's an option with some of it.  GIA would be next in the pecking order typically.

1. Max out our Cash ISA's and use those for dipping in and out of for holidays - they could be topped up with our own disposable income/bonus etc at the end of each year. The £20k mentioned above has already been put into my wifes ISA for this years allowance - but probably stick another £20k in next year in April out of the £170k cash.

cash ISAs are less favourable than S&S ISAs.   Any reason for focusing on cash ISAs?   How would you using £20k with Vanguard fit with this?

4. Overpay the mortgage (5yr fixed for another 4 years currently) so can over pay 10% every year without penalty and rather than reduce monthly outgoings, reduce the term, as that maxes the amount of interest reduction we would pay. Do that over the next 4 years.

An option for some of it up to the point you can overpay.  Not as financially good as pension and potentially the ISA at this time but still viable.

penners324

As much as possible into your pension.... possibly open 1 outside of your work pension as well.
And look into what it's invested in.

Albermarle

We both have private pensions - I'm earning around £70kpa, wife less than £10kpa. We have 2 children both under 11.

Presume from your other comments , you mean you have a workplace pension ? 

 Maximise pension payments for my work - as employer matches them - so i can increase the payments i make upto 5% i think, which will be more tax efficient for me and also mean I save more into my pension and get more from my employer.

Regardless of the inheritance/house sale money , you should always put enough in your pension to gain maximum employer contributions . If not you are just throwing away free money .

Then as a higher rate taxpayer , you should if possible contribute enough to your pension , to maximise higher rate tax relief. This is a very generous benefit for higher earners . I have not done the calculation exactly but this would mean adding around five times as much as you do now . In any case 5% contribution is low, and you need to start adding more if you have any ambitions to retire early.

Also your wife can claim tax relief on pension contributions up to her gross salary , even though she is not paying any tax .

Appreciate you can not do everything, and you have the children etc but it is clear some more focus on building up retirement funds and using the tax breaks of a pension should be more of a priority. 

Thrugelmir

Maximise your pension and pay down your mortgage. While still enjoying life. Time you cannot buy. 

ColdIron

As a higher rate tax payer, pension contributions are a no brainer for most. You can put a lot more than 5% into them, Does your employer operate Salary Sacrifice? If so even more compelling. The tax relief is very generous and may not last forever. Make hay while the sun shines

funkyfin2000

Thanks all, that's helpful.

Looking at my pension and salary sacrifice I pay 4% at the mo and work puts in 4%>>>

I can put 10% in and they will put in 7% that's the max.

Sounds like it's a no brainer... Is there any calculators out there that will show me what impact that will have on my take home with the better tax efficiencies to?

If it reduces my monthly pay packet I may need to drip feed some of the inheritance in monthly to support.

After that it looks like mortgage over payment and then ISA s/s .

The reason for putting stuff in a cash ISA was really for easy access for holidays or emergency payments of things etc.

Thank you so far for the advice. Does the above sound like a positive way to move forward.

Alexland

funkyfin2000 said:

Looking at my pension and salary sacrifice I pay 4% at the mo and work puts in 4%>>>
I can put 10% in and they will put in 7% that's the max.
Sounds like it's a no brainer... Is there any calculators out there that will show me what impact that will have on my take home with the better tax efficiencies to?

Getting employer contributions is free money especially when you save NI on your contribution too.

Here is the MSE calculator you enter a lower salary reduced by the amount you have sacrificed to see the resulting income tax and NI (assuming the profile of the income was flat not lumpy)

https://www.moneysavingexpert.com/tax-calculator/

If it reduces my monthly pay packet I may need to drip feed some of the inheritance in monthly to support.

Essentially you would be spending your inheritance on your normal everday living costs as you are getting paid less in return for the higher pension contribution. You might consider making significantly higher pension contributions to get your adjusted net income under £50k each tax year to avoid higher rate tax and get child benefit again.

https://www.gov.uk/guidance/adjusted-net-income

There is even an advanced little known method of scheduling contributions we on the forum call 'lumpy sal sac' where you vary your contributions in each month to always make the minimum pension contribution to get maximum employer matching but then make your additional contributions in very few months to save both higher rate tax and 12% NI on some of the value but remember the employer always needs to pay you at least minimum wage in any pay period.

funkyfin2000 said:

The reason for putting stuff in a cash ISA was really for easy access for holidays or emergency payments of things etc.

Yes you ideally should already have a cash buffer / emergency pot - if not then yes this would be a time to establish it.

In terms of your previous comments about the children's accounts that's already a lot of money for them to get access to at age 18. Consider if you really want to gift them any more money or if you would prefer to just 'even them up' and hold additional money in your adult ISA accounts to have more control over how it is spent in future. Also if it's invested in stock market investments consider if they have the 5-7 years that might be required to recover from a bad crash before it is expected to be spent. When they are teenagers and if they are likely to spend the money at 18 it might be time to move them to Cash Junior ISAs which tend to have preferential interest rates which seem likely to increase further over the next few years if you shop around.

EthicsGradient

I don't think you really need a Cash ISA right now - while you, as a higher rate taxpayer, can earn £500 a year in interest without paying tax (your Personal Savings Allowance), your wife can earn about £9,000 in savings interest before she starts to pay tax on it - £1,000 PSA for her, plus a starting rate of 0% for £5,000 since she's a low earner, and the remainder of her Personal Allowance. And you won't get anywhere near that with current interest rates. And, according to the MSE tables (see under Banking & Savings at the top), the interest on non-ISA products is a little better than with ISAs. You could also consider a notice account for some of it, if, say, 3 months notice on some spending (holidays? New cars?) is feasible. 

Thrugelmir

funkyfin2000 said:

Thanks all, that's helpful.

Looking at my pension and salary sacrifice I pay 4% at the mo and work puts in 4%>>>

I can put 10% in and they will put in 7% that's the max.

Sounds like it's a no brainer... Is there any calculators out there that will show me what impact that will have on my take home with the better tax efficiencies to?

If it reduces my monthly pay packet I may need to drip feed some of the inheritance in monthly to support.

After that it looks like mortgage over payment and then ISA s/s .

The reason for putting stuff in a cash ISA was really for easy access for holidays or emergency payments of things etc.

Thank you so far for the advice. Does the above sound like a positive way to move forward.

Spreading the money across different pots will enable you to be flexible and adjust as circumstances dictate. Life has a habit of throwing curved balls. Covering all eventualities while not maximising potential returns will be more optimal. In essence insurance allowing you to sleep peacefully at night. If in doubt drip feed. There's no rush. 

funkyfin2000

Thanks all - I've just literally ask my employer to up pension payments to10% so I get their 7%...

What I failed to say originally, is that my basic pay is £52k + Car Allowance of £6.4k and then commission that goes up and down.... currently I've cancelled Child Benefit as I was earning £70k+ with commission etc.