Best way to invest £500k inheritance?

Keep_pedalling

What_time_is_it said:

ŶKeep_pedalling said:

Are you married or in a civil partnership? If not then you both should reconsider your marital status as the premature death of your partner is going to leave you facing a massive IHT bill. 

Yes - civil partnership. 
I'm not sure what the IHT implications of that are to be honest?

It means anything left to a civil partner or spouse is exempt as it is covered by spousal exemption so IHT will not apply to the estate of the first to die.

Linton

What_time_is_it said:

Keep_pedalling said:

Are you married or in a civil partnership? If not then you both should reconsider your marital status as the premature death of your partner is going to leave you facing a massive IHT bill. 

Yes - civil partnership. 
I'm not sure what the IHT implications of that are to be honest?

An inheritance left to a married spouse is free of IHT.  The same inheitance to an unmarried partner is not. The difference could be large with >£500K in assets.

If you are unaware of these types of issues I would re-emphasise my suggestion of paying for advice.

What_time_is_it

Linton said:

What_time_is_it said:

Keep_pedalling said:

Are you married or in a civil partnership? If not then you both should reconsider your marital status as the premature death of your partner is going to leave you facing a massive IHT bill. 

Yes - civil partnership. 
I'm not sure what the IHT implications of that are to be honest?

An inheritance left to a married spouse is free of IHT.  The same inheitance to an unmarried partner is not. The difference could be large with >£500K in assets.

If you are unaware of these types of issues I would re-emphasise my suggestion of paying for advice.

Thanks. Learning all the time!

Albermarle

What_time_is_it said:

handful said:

What_time_is_it said:

sevenhills said:

Put the maximum amount in both your pensions.

Under HM Revenue & Customs (HMRC) rules there is a limit on the total amount you can save each tax year into all registered pension schemes and the tax relief you receive on your contributions. The maximum is 100% of your relevant UK earnings. The annual allowance limit for the current tax year is £60,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements.

@sevenhills - Is tax relief on pension contributions capped at the same amount as the income tax you pay over the year? Or can tax be recovered against previous years' income tax payments providing that the total pension contributions do not exceed 100% of earnings in the current year?

Tax relief is capped based on how much you earn or £60,000, whichever is the lower. so if you earn £60k or more the most you can contribute net is £48k becasue you have to add 25% to your contribution to calculate the gross contribution, if that makes sense! I've just done a simiar thing with an inheritance but mine wasn't as much as yours. It's a lovely feeling paying off the mortgage sooner than expected!

Thanks @handful. I guess what I'm asking is whether it's possible to claim back more tax relief than the amount you have paid over the year (by using previous years' tax maybe?)?

e.g. If I earn £40k and pay income tax of about £6k on it over the year, but I put away £2,500 into my pension pot each month and get £625 tax relief added to my pension each time, will this tax relief when I hit £6k for the year? Or will I end up paying £6k in tax, but getting back £7,500 in tax relief?

To avoid confusion it is good to know that how much tax you pay, and how much tax relief you can get are unrelated.
The amount of tax relief you can get is just based on your gross salary only.

How much tax you pay can be affected by many things eg benefits in kind, profit from renting a BTL etc etc

As previously mentioned if you have a low salary ( say £10K ) and pay no tax you can still add £8K to a pension and get £2K tax relief, so you can see that tax paid and tax relief are not connected.

You can not claim any tax relief from previous years. 

So the max tax relief you can get is based on your gross salary in this tax year.

El_Torro

WIth £500k in cash and a £90k mortgage I would probably wait until your low interest mortgage rate ends in summer 2024 and then pay it all off. That still leaves you plenty of money to put into investments (pensions, Stocks & Shares ISAs, and possibly elsewhere too).

I don't always advocate the use of an IFA, but in this case I think Linton's suggestion of finding one is probably the right way to go. It will help if you are clear on what you want to do with the money. Retire early? Secure your kids' futures? Buy a bigger house? Something else?

An IFA would be especially useful if you're not familiar with how and where to invest. 

cwep2

Pension is first thing to do, others have covered this point fairly comprehensively. Limited to current earnings per year. 

Mortgage, may as well keep this until low fixed rate runs out then pay off in full. Monthly outgoings will drop off quite a bit once you remove this expense!

I would max out ISA contribution this year for both of you (£20k each per tax year), tax free returns for life. Invest in equity tracker fund (or MMF if you want to keep it in cash).

Outside ISA wrapper most would recommend equity tracker funds again for your time horizon. For cash (eg to pay off mortgage when fix ends) combination of easy access and fixed rate bonds, ideally maturing semi-regularly (once a quarter?) or to match the maturity of the mortgage. Premium bonds are OK if you are higher rate tax payer and put >£25k into them. Check rates on MSE site for best ones, you can get 4.8-5% easy access and 6-6.2% 1yr fixes right now. Higher rate tax payers should look at low coupon Gilts as alternative to fixed rate bonds (search for TN25 on this forum and you’ll find loads of info). 

In terms of retiring early the two things to be aware of are 1) that pensions are probably untouchable until at least 55, maybe 57, state pension 67-69; 2) most FIRE calculations reckon 3-4% drawdown per year is sustainable on a pot of investments. 

On that basis if you were to quit work now (and got inheritance tomorrow) you have net savings around £450k, which equates to around £18k pa you could take from it (assuming mortgage paid off/offset). £15-20k pa better off when you can draw private pensions, and £20k pa more with state pension assuming you both achieve 35yrs NI qualifying years. That’s in todays money. 

So post state pension age that’s >£50k with no housing costs, which is very comfortable, but before you can draw your DB pensions the £18k probably isn’t enough. In reality you’d structure this with a higher burn rate now dropping off when you get DB pensions and state pension which (guessing a lot of details) gives a steady ish £45-50k from now onwards, but that would deplete most of your savings pot by time you hit state pension age, also if you didn’t have full state pension would be worse. IFA could advise with much more detail. 

In reality the right path is probably working a few more years, possibly reducing hours/part time and increasing pension pots, hitting 35 NI qualifying years to max state pension (part time will also achieve this) and then retire 50s probably a few years before can get DB pensions. Having done this you’ll be in an even better position.

I’d probably want to increase standard of living now a bit too (reduce hours/days worked, nicer holidays, more leisure time, improve home), but you asked about investing it!

What_time_is_it

Thanks @cwep2. That's a really comprehensive and useful answer.