Investing lump sum without paying lots of tax

Green_hopeful

I have unexpectedly received a pay out. I think it will be about £80k after tax. As the payment is taxable, in addition to my normal pay, it will make me a higher rate tax payer this year.  So looking to invest it without going crazy paying tax. I won’t be working in the next financial year. 

I already have max premium bonds. I have a stocks and shares ISA (about £16k from previous years) but haven’t felt confident in my investment ‘decisions’ and now I am going to have to live on my savings for the future 6.5 years until my pension pays I am slightly more risk adverse. I also have about £9k in various regular savings accounts. 

So my possible plan is to put it into a one year fixed bond that pays the interest next year which hopefully will delay the interest and stop me paying tax unnecessarily. Does this sound ok. Does anyone have a view on the best bond to pay out in the next financial year. I did wonder about putting the money in a longer bond but who knows what will happen to interest rates. 

Doctor_Who

Green_hopeful said:

I have unexpectedly received a pay out. I think it will be about £80k after tax. As the payment is taxable, in addition to my normal pay, it will make me a higher rate tax payer this year.  So looking to invest it without going crazy paying tax. I won’t be working in the next financial year. 

I already have max premium bonds. I have a stocks and shares ISA (about £16k from previous years) but haven’t felt confident in my investment ‘decisions’ and now I am going to have to live on my savings for the future 6.5 years until my pension pays I am slightly more risk adverse. I also have about £9k in various regular savings accounts. 

So my possible plan is to put it into a one year fixed bond that pays the interest next year which hopefully will delay the interest and stop me paying tax unnecessarily. Does this sound ok. Does anyone have a view on the best bond to pay out in the next financial year. I did wonder about putting the money in a longer bond but who knows what will happen to interest rates. 

Do you mean 'investing' (putting money in the stock market) or 'saving' (putting money in savings accounts)? From what you say I suspect you mean 'saving'. Being a higher rate tax payer this year, one of the most tax effective options would be to add some money to your pension (or take out a new DC pension if you currently have a DB pension). This obviously carries more risk depending on where you invest, but would be the most tax efficient. Maxing the ISA contribution (either cash or S&S, depending on when you would require access) would also be sensible. Also keep enough money in an easy access account to live on so you don't need to sell S&S in a downturn. Some fixed rate accounts should also help move interest to the next tax year where it will fall inside your personal allowance.

Albermarle

As above, putting more in your pension is the usual go to in these situations. However reading your post again it seems that you are stopping working in the next tax year, and you will need this £80K to live off until your pension pays out? Is that correct? On the other hand pension contributions are very tax effecient for a higher rate taxpayer.
I think to give a more accurate answer we need some more details.
Your age ?
Your approx current salary
What type of pension do you now have . DB or DC. ? If you are not sure check the link below
Pension basics | Help with pension basics | MoneyHelper
is there a fixed payout date or is is flexible.?

EthicsGradient

Green_hopeful said:

I already have max premium bonds. I have a stocks and shares ISA (about £16k from previous years) but haven’t felt confident in my investment ‘decisions’ and now I am going to have to live on my savings for the future 6.5 years until my pension pays I am slightly more risk adverse. I also have about £9k in various regular savings accounts. 

As above, a way of putting it into a pension would seem a good idea if that would allow you to start to draw a pension earlier (depending on your age - is the 6.5 years the time until you reach the minimum age for any personal pension, ie 57 (in 6.5 years' time); or is that set by a minimum age for you existing pension?)

If you don't expect to get any income from a job in those 6.5 years, and can draw on a pension towards the end, that would work out well from a tax point of view - you get higher tax relief on the contributions this year, and would be able to use all your personal allowance for it before paying any tax on the way out.

If your existing pension can't be drawn earlier if you put some of the money into it, then I'd think it should be possible to set up a SIPP yourself. Money market funds are a way to get the rough equivalent of savings' interest rates inside a SIPP without the risk of stock or bond markets.

jaceyboy

I wouldnt bother putting it in a pension, mine has lost over £50k since Covid and the War, unless youve got bags of time chuck it in Cash ISA's or fixed savings like you said

Swipe

jaceyboy said:

I wouldnt bother putting it in a pension, mine has lost over £50k since Covid and the War, unless youve got bags of time chuck it in Cash ISA's or fixed savings like you said

You can put cash in a pension you know, doesn't have to go into stocks or indexes. A money market fund will get you close to the BOE base rate.

Albermarle

jaceyboy said:

I wouldnt bother putting it in a pension, mine has lost over £50k since Covid and the War, unless youve got bags of time chuck it in Cash ISA's or fixed savings like you said

If the pension is to be taken in a short period, it can be kept in cash, or money market funds.
For a higher rate taxpayer £100 in the pension costs £60. Even if you pay tax on withdrawal, you are still 25% ahead before you even start.

Doctor_Who

jaceyboy said:

I wouldnt bother putting it in a pension, mine has lost over £50k since Covid and the War, unless youve got bags of time chuck it in Cash ISA's or fixed savings like you said

Pensions invested in the stock market are higher risk, but there are lower risk options, like money market funds, if you want to hold cash-like savings in your pension (I hold some of my SIPP in a MMF). Some providers also pay good interest on the cash held, I've seen figures mentioned upto the BOE base rate. Tax relief of 40% on pension contributions can't really be beaten.

Edit: Swipe and Albermarle beat me to it and have said what I said.......

dunstonh

I wouldnt bother putting it in a pension, mine has lost over £50k since Covid and the War, unless youve got bags of time chuck it in Cash ISA's or fixed savings like you said

 That is not at all helpful to the op.  Your misinformation helps no-one.    Pensions do not make or lose money.   The investments in them do that.         

The OP would use Short Term money market funds in the pension (and possibly a small amount of equities for the period covering years 4-6).         That way they get the tax advantages (effectively free money in this case) without investment risk.

Green_hopeful

Doctor_Who said:

Green_hopeful said:

I have unexpectedly received a pay out. I think it will be about £80k after tax. As the payment is taxable, in addition to my normal pay, it will make me a higher rate tax payer this year.  So looking to invest it without going crazy paying tax. I won’t be working in the next financial year. 

I already have max premium bonds. I have a stocks and shares ISA (about £16k from previous years) but haven’t felt confident in my investment ‘decisions’ and now I am going to have to live on my savings for the future 6.5 years until my pension pays I am slightly more risk adverse. I also have about £9k in various regular savings accounts. 

So my possible plan is to put it into a one year fixed bond that pays the interest next year which hopefully will delay the interest and stop me paying tax unnecessarily. Does this sound ok. Does anyone have a view on the best bond to pay out in the next financial year. I did wonder about putting the money in a longer bond but who knows what will happen to interest rates. 

Do you mean 'investing' (putting money in the stock market) or 'saving' (putting money in savings accounts)? From what you say I suspect you mean 'saving'. Being a higher rate tax payer this year, one of the most tax effective options would be to add some money to your pension (or take out a new DC pension if you currently have a DB pension). This obviously carries more risk depending on where you invest, but would be the most tax efficient. Maxing the ISA contribution (either cash or S&S, depending on when you would require access) would also be sensible. Also keep enough money in an easy access account to live on so you don't need to sell S&S in a downturn. Some fixed rate accounts should also help move interest to the next tax year where it will fall inside your personal allowance.

Sorry should have been clearer. I meant saving.  I need the money to live on over the next few years. 

Green_hopeful

Your age ? 53
Your approx current salary. No salary beyond what I have earned this financial year of £23k
What type of pension do you now have . DB or DC. ? If you are not sure check the link below
Pension basics | Help with pension basics | MoneyHelper
is there a fixed payout date or is is flexible.? I have several pensions. The biggest is a civil service DB pension from my divorce settlement which pays out when I am 60 and should be enough to live on. Circa £20k per year. Then I have another couple of DB pensions from my own work and a DC pension from my most recent job. Much less money but will top up the main pension. My most recent pension doesn’t seem to predict paying out very much at all but perhaps that is because I am comparing DB and DC pensions. 

Can I pay into an existing DC pension after I have left or do I need to set up another one.