Receiving 100k, what to do with it?

spillthebeans

Hi, my father in law is gifting us £100k and we're not quite sure what to do with it!

• We're both early 50's.
• I'm in the highest tax bracket and my wife is in the basic rate.
• We have about £60k left on the mortgage which is an offset mortgage with an interest rate of 6.8%.
• We have a son who has just started a five year course at Uni, and has taken a full loan at 4.3% interest 
• We have daughter who will hopefully start her Uni in two years time.
• We try to keep as much money as possible in the offset mortgage accounts, but we also put about £1200 into an ISA each year.
• Pensions wise, we're not bad - could always do with more of course!

We'd like to give each of the children a lump to be used as a deposit for their first house, but ideally keep it out of their reach so it's not frittered.

There's nothing else we really want or need (well, I neeeed a motorbike but that's another subject) so we're just looking to be as efficient and wise as possible with the incoming money.

Would really appreciate any gotcha's to look out for or any pointers on what to consider

Thanks!!

Mark_d

I'd certainly pay off the mortgage. 6.8% is a fairly high interest rate.  That leaves £40k.

If you son buys his own property after graduation, the size of mortgage will be hampered by his student loan repayments.  If he's buying on his own, his monthly costs will be high.  If he buys with a partner, then your gift could cause complexity/inequality with ownership of the property.

I suggest the £40k is best used to support the university costs for your son and daughter so that they start their professional careers without the burden of big, costly student loans.

gambleruk

I would open a Lisa for both your son and daughter and deposit £4000 now and then again next April, that way they will both have £10,000 towards an house deposit which is out of their reach unless they wanted to lose money withdrawing it, it has worked really well for our son though he still moans he wishes he could use it to buy a new car lol.

Albermarle

I suggest the £40k is best used to support the university costs for your son and daughter so that they start their professional careers without the burden of big, costly student loans.

The usual advice from MSE ( and others) is to take the full loans, as it is not a normal debt, and a majority never have to pay all of it back. However the new rules for 'Plan 5' starting in 2023 makes it a bit less clear cut, and it partly depends on what sort of career the student may have. Someone studying a subject with high earning potential, could benefit from paying the costs up front, if they could afford it of course. It is all explained here.
Martin Lewis' 6 need-to-knows about 'Plan 5' English student finance (moneysavingexpert.com)

In any case, even with the full student loan for tuitions and maintenance, many parents have to supplement the maintenance loans significantly, for the student to be able to afford to live.
For two students for eight years - £40K would not even cover that fully , especially since the recent bout of inflation and rapidly rising rents.

• We're both early 50's.
• I'm in the highest tax bracket and my wife is in the basic rate.

OP - Assuming that 40% tax relief will not be a victim of the upcoming budget ( probably not), then you should be making best use of this very generous tax break. ( if not doing already)

eskbanker

Albermarle said:

• We're both early 50's.
• I'm in the highest tax bracket and my wife is in the basic rate.

OP - Assuming that 40% tax relief will not be a victim of the upcoming budget ( probably not), then you should be making best use of this very generous tax break. ( if not doing already)

If OP literally means highest tax bracket, rather than simply the higher one, then the relief may be more than 40%!

Exodi

eskbanker said:

Albermarle said:

• We're both early 50's.
• I'm in the highest tax bracket and my wife is in the basic rate.

OP - Assuming that 40% tax relief will not be a victim of the upcoming budget ( probably not), then you should be making best use of this very generous tax break. ( if not doing already)

If OP literally means highest tax bracket, rather than simply the higher one, then the relief may be more than 40%!

Yes likewise assuming the OP meant to say the higher tax bracket and not highest!

Mark_d said:

I'd certainly pay off the mortgage. 6.8% is a fairly high interest rate.  That leaves £40k.

Personally while paying off the mortgage is an option, I wouldn't rush to do it without at least considering all of the options.

For example, what is the OP's income and when do they intend to retire?

As the OP is into the higher rate tax bracket, they could cut their salary and increase their pension contributions, claiming back the higher rate tax relief (and a load of NI if salary sacrifice is available to them, but this might not last long!).

To illustrate this (using an example where they are £20k into the higher rate).

Currently OP is paid the £20k and receives £12k in their pocket (after 40% tax, I'm deliberately ignoring NI in this example to keep things simple).

Alternatively, they could raise their contributions by £12k, which would automatically get tax relief at the basic rate of £3k. They can then apply for a refund of the higher rate tax paid and would receive £3k in their pocket (if anyone is thinking £12k+£3k+3k only adds up to £18k, this is because the higher rate tax relief is refunded into your pocket - so is the net of 40% tax). Of course the OP may be thinking, "Are you mad? I can't just take a £20k pay-cut!" but this is where the gift money comes in.

If they did the above, they'd turn £12k in their pay packet, into a pension contribution of £15k and £3k in their pocket. They could then use £9k from the gift to make up the missing income. If they balance the money they get back in higher rate relief, they're effectively turning £9k in their pocket into £15k in their pension - which is better rate than a 6.8% mortgage or 4.3% student loan. It highlights the power of higher rate tax relief (and it gets even more silly if you have access to salary sacrifice and you save on NI and employer NI - assuming it's not all axed in the budget) - as a starting point I'd consider contributing down the basic rate band and perhaps keeping the gift money in the offset account over the years you do it so you're getting the best of both worlds.

gambleruk said:

I would open a Lisa for both your son and daughter and deposit £4000 now and then again next April, that way they will both have £10,000 towards an house deposit which is out of their reach unless they wanted to lose money withdrawing it, it has worked really well for our son though he still moans he wishes he could use it to buy a new car lol.

I think this isn't a bad idea either.

MEM62

Buy the motorcycle.  

Beddie

You could offset the entire mortgage balance, but don't pay it off. Then you still have access should you need it.

Lisa, as mentioned above, is a great idea. And if you want to give them more money towards a deposit, do so when they are buying a place, not sooner.

spillthebeans

Hi, thanks everyone for your replies, really helpful!

Fwiw I did mean highest tax rate, which means I have lost my personal tax allowance.

@gambleruk, the LISA sounds great, thanks very much will investigate.

@Albermarle, I assume the tax relief you mention is for putting money into my pension?

@Exodi, I'm so sorry to ask for more of your time, but I don't quite understand what you're saying there..

I understand this bit:
[Assuming I'm 20k into the high tax bracket]
"Currently OP is paid the £20k and receives £12k in their pocket (after 40% tax, I'm deliberately ignoring NI in this example to keep things simple)." 

But I dont understand this bit:
"Alternatively, they could raise their contributions by £12k, which would automatically get tax relief at the basic rate of £3k"?

And to be honest I'm lost from there! I think fundamentally I didn't understand this piece:

"as a starting point I'd consider contributing down the basic rate band". Can you ELI5?


I am also happy by the way that the money all goes through my wifes basic rate if that makes more sense (well, except for the motorbike bit - thanks @me@MEM62

 

artyboy

Bit late the party, but for me, funding the kids through Uni would be my #1 priority. I fundamentally disagree with the MSE position on student loans - it might not be a loan in the traditional sense, but it's a debt at commercial rates of interest, paid back as yet another tax on income, and with the thresholds decreasing with every new iteration.

As if it wasn't hard enough for this generation to get on the housing ladder... I consider myself lucky to be a Gen X, and even luckier to be able to support my kids and level the field a bit for them...

Exodi

spillthebeans said:

@Exodi, I'm so sorry to ask for more of your time, but I don't quite understand what you're saying there..

I understand this bit:
[Assuming I'm 20k into the high tax bracket]
"Currently OP is paid the £20k and receives £12k in their pocket (after 40% tax, I'm deliberately ignoring NI in this example to keep things simple)." 

But I dont understand this bit:
"Alternatively, they could raise their contributions by £12k, which would automatically get tax relief at the basic rate of £3k"?

And to be honest I'm lost from there! I think fundamentally I didn't understand this piece:

"as a starting point I'd consider contributing down the basic rate band". Can you ELI5?

Hi, no problem, appreciate it was a lot to take in.

So it's good you understand the first bit, that you'd (hypothetically, I don't know your exact income) receive £12k in your pocket from £20k of earnings over the higher tax band (ignoring NI again to keep things simple).

The second bit depends on the type of pension you have. Most people are enrolled in a 'Relief At Source (RAS)' pension scheme, which means your pension contributions are taken from your pay after tax is deducted. Then when the pension contribution is received in your pot, the provider by default claims back the tax relief at the basic rate (20%). So a pension contribution of £1000 in your pot gets £250 added as tax relief.

However as you are a higher rate tax payer, you paid 40% tax on the money before it went into your pension, but are only receiving a refund for 20% in your pot. Therefore you are able to claim the additional tax paid (called higher rate tax relief). Note that this part of the tax relief is paid into your pocket.

So understanding this I'm suggesting, instead of receiving £12k in your pocket from being paid the £20k of earnings, you could ask your employ to increase your net pension contributions by £12k.

What this does (aside from obviously reducing your pay) is puts £12k in your pension pot. You then get basic rate relief as above of £3k to make £15k in your pension. You then claim higher rate relief of £3k which goes in your pocket.

Alternatively you may have your pension contributions taken from your gross pay (e.g. salary sacrifice). In this situation you would ask to reduce your gross pay by £20k to be paid directly into your pension (and you don't need to worry about tax relief as you don't pay any tax on this money).

Obviously you're short £9k-£12k after doing this, which you could make up the shortfall with the gift.

As I said before, you're effectively gaining 40% on the money in your pocket (or another way to think of it is why would you worry about saving a couple of % in interest, when you're paying 40% tax on the money you receive from your employer?).

There are a few other things to consider, but I'm trying to keep it simple:

- Employers often match employee contributions up to a certain %, I don't know if you've maxed the employer contribution, but if not that's another upside to the above strategy
- If you can make contributions from your gross pay (e.g. salary sacrifice), you also save a significant amount of NI and employer NI.
- You only receive relief on the tax you paid, a common mistake is thinking that because someone is £1 into the their rate tax bracket, they're entitled to claim a 40% tax refund on all their pension contributions.

If it still feels like I'm speaking a different language, I'd definitely recommend some light research on the topic. Firstly identifying what type of pension you have (or you can tell us), work out your adjusted net income to see how much mileage there is in the above (and this includes benefits in kind like a car or health insurance) - obviously if you are only £1 into the higher rate tax bracket this is less exciting.