Investing £100k tax efficiently

valuepack

Hi all

I'm due to inherit some money. At 48 I'm not as carefree with money as I used to be, but I've 18 years left on our mortgage, and I've not paid as much into my pension over the years as I could have.

I want to invest this inheritance for 20 years and forget about it.

What is the most tax efficient way of doing this?

I have a saver account with my bank earning the small amount of 1.38%

My rough plan is to max out my annual ISA allowance with 20k in a stocks and shares ISA, and put the remaining 80k into a savings account earning a better rate, 3-4% is better than my saver account.

Then next year max out the ISA allowance again in a stocks and shares ISA, then rinse and repeat until all the money is moved over.

Will I have to pay Capital Gains Tax on the interest earned on the savings not in the ISA?

I'm a basic rate tax payer.

Is this a good plan?

Any comments welcome, thanks.

Keep_pedalling

How much do you have left on your mortgage and what interest rate are you paying.

You should be looking at filtering some of it into a pension especially if you don’t want to touch it for 20 years.

Dazed_and_C0nfused

Pensions are usually more tax efficient than an ISA.

What is making you favour an ISA over a pension?

You might have income tax to pay on the interest from non ISA accounts but not Capital Gains Tax.

valuepack

@Keep_pedalling There's £160k left on the mortgage and our 2.9% fixed rate ends in May. 

@Dazed_and_C0nfused I've only ever had employer provided pensions. My current employer pays in 15% and I'm currently paying in 7.5%. 

I've only ever paid into a pension out of earnings deductions so unsure how to pay in with myself.

Is this where starting a SIPPS would help?

Dazed_and_C0nfused

valuepack said:

@Keep_pedalling There's £160k left on the mortgage and our 2.9% fixed rate ends in May. 

@Dazed_and_C0nfused I've only ever had employer provided pensions. My current employer pays in 15% and I'm currently paying in 7.5%. 

I've only ever paid into a pension out of earnings deductions so unsure how to pay in with myself.

Is this where starting a SIPPS would help?

Possibly yes.  But increasing contributions in your employers scheme and making up the take home pay shortfall out of your inheritance is another option.

That is definitely something to consider if there is still room for additional employer matching.  15% is at the more generous end of things so you may already be getting the most they will pay though.

£100 into an ISA is £100, with no tax to pay, when you come to take it out (ignoring investment gain and any fees).

£100 into a pension becomes £125 with the pension tax relief.  25% is tax free when taken out (assuming the upper limit of ~£268k tax free cash isn't breached) and the rest is taxed.  If you will be a basic rate payer in retirement that is a total return of £106.25 (ignoring investment gain and any fees).

So pension beats ISA by 6.25% for lots of people.

EthicsGradient

Are you married ("our mortgage")? If so, you can make use of your spouse's ISA allowances, and savings interest zero rate band (£1000 for a basic rate taxpayer) as well as yours. 

If you're "due to inherit", it'd be great for you if you could get some of the money in this tax year, for which you could then use this tax year's ISA allowance (even if you shove it in a basic cash ISA to get it done quickly, you can then transfer that to an S&S ISA later). It might be worth asking the executor if there's any chance of this.

valuepack

@Dazed_and_C0nfused Thanks for that info, that makes sense.

I did have a play with our workplace pension calculator and if I increase my own contributions from 7.5% to 10%, the employer contribution only goes up from 15% to 15.5% (from memory), so I think I'm already getting a good deal here. 

Admittedly I could be paying more in myself. I was paying in 7.5% but recently dropped it to 5.5% to increase my take home pay. This was to boost my take home pay in the six months leading up to the end of our fixed rate mortgage. My thinking was that this might boost our affordability by a small amount, but on second thoughts it's part of my gross pay anyway and would be classed as savings.

So if I were to take out a SIPP, I could pay in up to 100% of my job earnings amount, choose how that money is invested and be tax free?

It sounds just like a stocks and shares ISA, other than I can't withdraw funds until retirement.

valuepack

@EthicsGradient We're not married. I considered looking into whether gifting money would be acceptable tax avoidance but I don't want to put the temptation of a big pot of money her way.

I trust her completely but I've learned from past experience that money can do strange things to people.

My secret plan is that if I can get going with a nest egg that will look after both of us, she can stop working (she's part time) in 10 years when she turns 60, and I can then stop working at male retirement age, whenever that is at the time.

Regarding the inheritance, probate solicitors have been assigned and were following intestacy as we couldn't find a will. They then found a will, but of the two executors appointed, one is dead and the other is no longer practicing. Plus, one of the beneficiaries died over 30 years ago and as it turns out they need to go through probate too.

So it's very unlikely that this will be sorted by April, but I will ask the question, thanks.

HedgehogRulez

Pension is the correct answer 

Keep_pedalling

valuepack said:

@EthicsGradient We're not married. I considered looking into whether gifting money would be acceptable tax avoidance but I don't want to put the temptation of a big pot of money her way.

I trust her completely but I've learned from past experience that money can do strange things to people.

My secret plan is that if I can get going with a nest egg that will look after both of us, she can stop working (she's part time) in 10 years when she turns 60, and I can then stop working at male retirement age, whenever that is at the time.

Regarding the inheritance, probate solicitors have been assigned and were following intestacy as we couldn't find a will. They then found a will, but of the two executors appointed, one is dead and the other is no longer practicing. Plus, one of the beneficiaries died over 30 years ago and as it turns out they need to go through probate too.

So it's very unlikely that this will be sorted by April, but I will ask the question, thanks.

If either of you have in excess of £325k in assets you might like to think about your marital status or whether you have sufficient life insurance to cover an IHT bill should either of you meet an unfortunate early demise. 

If you don’t have wills or LPAs in place that should be on the very top of your too do lists.

saajan_12

valuepack said:

Hi all

I'm due to inherit some money. At 48 I'm not as carefree with money as I used to be, but I've 18 years left on our mortgage, and I've not paid as much into my pension over the years as I could have.

I want to invest this inheritance for 20 years and forget about it.

What is the most tax efficient way of doing this?

If you're thinking of this as 20y+ savings for retirement, then adding it to your pension means that its invested for you and tax efficient. That's as long as you're not in a higher tax band in retirement due to lots of passive income than you are now. Reason is the growth is tax free same as an ISA, but also you save the income tax now and only pay income tax at the band you're at plus a 25% tax free. 

What you'd do is contact your company pension provider and ask to make a lump sum payment. There's a few ways it can be treated so you'd need to check with them how the tax gets claimed back. 

valuepack said:

I have a saver account with my bank earning the small amount of 1.38%

My rough plan is to max out my annual ISA allowance with 20k in a stocks and shares ISA, and put the remaining 80k into a savings account earning a better rate, 3-4% is better than my saver account.

Then next year max out the ISA allowance again in a stocks and shares ISA, then rinse and repeat until all the money is moved over.

Will I have to pay Capital Gains Tax on the interest earned on the savings not in the ISA?

I'm a basic rate tax payer.

Well the average return on a stocks & shares portfolio is usually higher than 3-4%.. easily double that if you look at a diversified fund in the last several years. You can always put the money in an investment account outside an ISA if you also don't want to go the pension route.

Cash outside an ISA has no capital gains but will incur 20% income tax on the interest (as you'll be well over the £1k allowance), so another reason to avoid keeping it as cash.