What to do with £25k?

[Darkling1]

Longterm poster, but name changed for this thread.

I’m due to receive £25k through unfortunate circumstances and I’m trying to figure out how to utilise it. This is a life changing amount of money for me, so I want to make sure it’s balanced.

I have a long term partner and we bought a house together two years ago. We have £165.7k remaining on our mortgage. We’d like some work done to the house, but thankfully, none of it is urgent.

I’m not employed and I’m in receipt of disability benefits (contribution ESA) and I am hoping to be able to work again at some point next year.

I have a Stocks and Shares ISA (£8,100), some money in Premium Bonds (£1,400) and a small Emergency Fund (just over £1,000). I also have my old work pension.

How would you suggest I utilise this money? I’m in my 20s, by the way. I’d definitely like to overpay the mortgage, but I’m not sure how much of the money to use.

That really depends on lots of finer details and number crunching. E.g. what's your mortgage rate.

Premium Bonds are a really bad way to hold funds because the return is so poor - you're eroding your capital. You'd be much better moving them to a high rate savings account.

https://www.moneysavingexpert.com/savings/premium-bonds/#tips-10

Someone on another thread said save/invest/pay off debts with 80% of unexpected extra funds and use 20% for fun stuff.

If you do pay off extra on the mortgage make sure your contribution is noted officially should you and your partner ever split up and have to sell the house in the future.

Over the years whenever we got unexpected cash we used it to do the house renovations/repairs. Now we have nothing to do at all and it feels great plus we added value.

Invest wisely.
Don't pour it into a shared asset.
This is money to help you feel secure.
Don't blow it.

Unfortunately £25k won't make a dent on your mortgage and the repayments will only reduce to a small amount.
I would do the house works you need to do/improve - add some value. It won't be enough for a significant extension but it will resolve any issues you may have. With the rest prop up your emergency fund, (especially as you are out of work at the moment) stick your emergency fund in an ISA above 4%, this will grow in the background, I cannot recommend S&S isa as I have a concern about any stocks and the capacity to lose your deposits and more. Play safe is the long game

Well, the more you can put into retirement savings now = the more you'll have when you are older. By a massive margin at your age if, for example, you look at the money someone will have made historically by investing 20K in an S&P 500 tracker mutual fund. But of course money of that sort may impact your ability to claim certain benefits. If you don't absolutely need to spend money on the house then don't - as soon as you spend money on a joint-purchase with someone who is NOT your spouse then you are opening the door to potential co-mingling - which could be very problematic for you in the future if you separate. The best thing for you to do to maintain sole ownership over that money is to make sure it is entirely separate from anything to do with your partner - and the easiest way to do that is to put it in a retirement account that is specifically opened and only owned by you. By all means put him as a beneficiary if you wish. Sadly all too many women end up co-mingling their inheritance monies and have little way to get it back in future if the relationship fails. This is just one of many many many things I wish they would teach children about at school!

Some may view that post as very negative. Actually it's pragmatic and realistic: a large number of relationships do not work out. And the last thing your loved one would want is for your inheritance money to go to someone other than you.

If you do end up spending the money on the house then make sure you get legal advice before doing so to make sure you will be entitled to the value of that money back again should you split up and sell the house.

As far are retirement accounts go: talk to a retirement advisor with someone like Vanguard who can explain various mutual fund and ETF retirement options with you. At your age you can afford to be a bit more risk tolerant than if you were older. You can always put more than the ISA yearly allowance into such investment accounts - you'll just have to pay tax on any earnings.

Thank you. Yes, we’re going to have a Deed of Trust wrote up because I paid £5k more for our deposit. It’ll also recognise the amount I’ll overpay our mortgage by and how much I’ll pay towards the home improvements etc.

This isn't terribly good advice at all. Did you see how old she is?? She's young in investment terms. There are many excellent mutual fund and ETF options that will give better returns than 4% - which barely covers inflation. Loads of people are wary about stocks and shares - which is one of the reasons the rich get richer: they take advantage of that stuff and people with less of an education on that stuff just stick with savings accounts, savings ISAs and premium bonds - which barely keep up with inflation.

As for your comment about £25k barely making a dent in a mortgage: that is also incorrect - have you done the calculations on accumulated interest?? If the amount they are paying in interest is more than the amount they are earning in a savings account then of course it would make sense to pay down the mortgage! The reason NOT to do so is the fact that it may open her up to not being able to get that money back if she and her partner split up - so putting the money in would absolutely need to be done after consulting a lawyer to determine the best way to do so in such a way as to make sure her contribution is secure.

Again you are ignoring the fact that this is inheritance money - sole property. As soon as she spends it on repairs etc she may very well never get that money back again if they split up. Advising people to commingle inheritance funds like that is terrible advice.

Make absolutely sure that this will actually cover you - sadly deeds of trust can mean bugger all if the housing market in your area tanks, or if your partner runs up joint debts.

The only way to ensure that your inheritance money is kept absolutely separate is to keep it absolutely separate - and that means not mixing it with a joint asset.

My advice with my very sensible head on is to open a stocks and shares isa and put £20k in there. Pick half a dozen managed equity funds which each cover a different world market, to spread your risk. Compare their graphs of past performance to get an idea for how they might grow and the short term gains/losses you can expect, so you don't panic if they go down. Pay attention to the massive dip you'll see for 2020 (covid) and April this year (Trump tariffs) and the recoveries after to reassure yourself. Don't worry about short term losses. Leave that money alone for more than ten years.

Put the £5k in your emergency fund.

Don't spend anything on your house that your DP doesn't match pound for pound.

I have a valid perspective and point of view, that's my lived experience. The OP has a range of options and opinions to consider. Thanks for your input..

Do you need or want anything in particular - car / holiday / new kitchen / gym membership or just looking to save/pay off debts?

You say your £1k emergency fund is small so I’m inferring you’d like that to be bigger. I would be so tempted in your position to boost the s&s ISA to £10k. Overpaying the mortgage always appealing as it saves interest in the long term and lots of lenders will reserve overpayments in a separate pot which you can draw on to cover mortgage payments if something happens and you can’t cover your mortgage payments for a period.

I’ll be getting some inheritance money soon, less than half yours though. Although putting it towards the mortgage / savings is tempting I’m thinking of getting an electric car as I’ve wanted one for a while and now is my chance to buy a ‘not too old’ car without having to take out finance / a loan.

Exactly this.

Hooray! I'd follow this up with a suggestion to look for mutual funds/ETFs (and learn the difference and pros and cons between the two) that auto adjust over time to reflect different risk tolerances. A good example of this are the "Target Retirement Funds" that various investment companies offer that are set up to auto-adjust over time to rebalance. I'll pick one just as an illustrative example (but there are many others out there - and you should of course do your due diligence): Vanguard has a "Target 2055" fund, for example (and a Target 2045 etc etc) for those people who are planning on retiring that year/thereabouts: when you're younger it has more stocks in it...as you get older it adjusts to less risky investments. You can see how these types of funds do over time - and those companies will also have calculators that allow you to see what that kind of investment may look like when you are at retirement age. Someone who invests £25k at the age of 20 could well retire with a substantial amount of money - far more than someone who only invested in a savings account.
Is there risk involved??? Sure - but even if you invested only in an S&P 500 tracker and readjusted yourself over time - you'd still be sitting on a lot more money than someoen who just used a basic ISA savings account.

You also can, of course, spread your investments over different mutual funds - and likely should do so - but be aware of the costs of different investments.

One important thing to remember is that oftentimes you'll be asked whether you want to 'reinvest" dividends, or cash them out. At a young age the better approach usually would be to invest the dividends in more stocks - that way you get accumulation benefits. But, again, get investment advice on all of this stuff! Fortunately we live in a world with a huge amount of information online that can help you make those decisions - and given the OP has some time at home at the moment she could easily (if she's feeling well enough) take a course on investments etc etc so she has a better level of knowledge about such things. I think that's what I would do if I had some time on my hands and felt well enough to do so.

Your "valid" perspective isn't terribly helpful though is it??? Let's use an illustrative example:

If you invested £20,000 in an S&P 500 tracker at the age of 20, assuming an average annual return of 10% (which is around about the historical average), and holding it for 40 years until the age of 60, your investment could potentially grow to around £900,000. This is a significant increase due to the power of compounding over a long period.

If you invested the same money in a savings account that only gave you 4% per annum, you'd be looking at only having a future investment value, after 40 years, of about £100,000.

That's a HUGE difference.

Your "lived experience" does not appear to include doing the maths on the cost of accumulated mortgage interest payments. Claiming that taking £25k off a mortgage debt wouldn't "put a dent" in it is completely wrong! Particularly if the amount is applied to the principle.

If you're going to give advice to people please don't give them crappy advice - or at the very least caveat the information you are giving them. For example: if you've never invested in mutual funds or ETFs or target funds then say so. If your sole experience is putting money into a savings account then your "lived experience" isn't terribly helpful. Notice that you didn't suggest she seek any financial advice from an investment advisor.

This is not good advice

Give it to me 😁

ISAs and SIPPs are the way to go. I started mine when I was 30 and have 1.1 million now (nearly 60). I topped them up anytime there was bonus money.

Does savings affect ESA? If so you would be better using the money to clear any debts. I disagree that overpaying a mortgage is a bad idea. But don’t do it without checking if the mortgage has any penalties for doing so. If the mortgage is joint how does the other party view you using this money towards overpaying or if savings do affect t ESA you could invest this money in a SIPP self invested pension plan.

OP, don't use it for home improvements or paying down the mortgage unless your partner can match pound for.pound what you would be putting in. Even then I would be wary.
I would use £5000 to prop up your emergency fund as it is quite low. Maybe use £1000 for a nice holiday and the rest to a stocks and shares ISA. A global tracker would be your best bet for good diversity and then just leave it to grow.

Not sure it works like that.

New style ESA is not impacted by savings amounts (with the caveat that it may be impacted by pension amounts). It's based on national insurance payments over time - so your savings aren't reviewed as part of the calculation. It's more complex than that of course, but that's the basic idea.

Questions to ask yourself…

1. what is your mortgage interest rate and is it fixed?
2. what are the home improvements you’re thinking about and will they add value down the line
3. what are your retirement goals and are you on track for them now

These are a good start.

Now a little more detail on the questions but here’s where you need to start seeing how the above are related. Please note that I’m American so some of this may not be applicable or different for you and I’ve tried to note where I may not be correct or our systems are different.

If your mortgage rate is 4% and fixed for a long period (I think your mortgages work different than mine which are generally long term fixed for the life of the loan. Mine is 4%/30 year as an example).

You would be better off investing the money in a product like the FTSE 100 (I think that’s the equivalent of the US S&P 500 which is an index fund of the top performing companies but I may be wrong on the name of it so do your research!) which last year had a rate of return of 8%.

If you invest you don’t necessarily have to put it into a retirement fund (I really have no idea how your retirement plans work) instead leave it in a non retirement account then it could also be used as a catastrophic emergency fund.

In other words it’s better to pay 4% of interest on your mortgage and grow your money in the stock market by 8%.

Then on to the home improvements… if your idea is to get new carpet… well that’s nice and you’ll enjoy it I’m sure but you won’t see that money back. But if you added a bathroom that may increase the value of your house when you sell.

The last thing, is to park the money for a while you research your options. It’s better to sit in a basic low interest savings account than rushing into a decision and regretting it.

Exactly - having a payment "noted" doesn't do anything to ensure that you can get that money back in the event the relationship falters.

When it comes to inheritance moneys or any kind of single property (including earnings actually, for anyone who isn't married) the best way to keep control over it is to keep it separate from any kind of joint account or joint obligation and to make very sure that no one is using you as a co-signatory on ANYTHING - including credit cards etc or indeed anything that can be used to run up a debt.

A mortgage on a house might be different as some people can only afford to buy a house if they do so with a partner (and the rent savings can be very beneficial) but even then I would make damn sure that ownership and investment - together with anything put into the house) is secured via legal agreement. Sadly I've had family members (who didn't listen to me - because why would they listen to a lawyer?? urgh) lose loads of money because they got involved with mortgages and their relationship then broke down. And they were the ones who put the most effort into doing DIY/making the house look lovely, spending money on stuff for the house/garden etc etc. None of which they were able to get back when the house was subject to a forced sale.

Even worse is when people don't realise their other half has used them to sign up for debt accruing things like credit cards and maxes those things out when the relationship fails...leaving them on jointly on the hook for vast amounts of debt.