£400k from share of house sale

[Eastie77Returns]

Following the sale of my late parent’s house I am due to inherit the above amount.

Current situation: mid 40s, 2 DC (10 & 12), no debt, o/s mortgage £320,000. I work FT and I am in the higher tax bracket (45%).

The only major expense I need to pay out for is a loft conversion which is due to happen next year. Other than that a replacement (second hand) car is probably the only other thing I might need.

My DC have each inherited money separately from their grandparents but I would like to set aside some for them.

I’m aware I’ll pay full tax on the interest on any savings (aside from the ISA) as I do not have a personal allowance. No issues with this whatsoever, however I’m trying to find an online calculator that I can use to work out what I will owe HMRC each year at different interest rates? I’m just generally unsure of the best way to save/invest this money aside
from putting money in an ISA. I have never had more than a small amount in savings at any one time.

I was connected to an IFA via unbiased and we had a helpful initial chat. He advised holding off on overpaying on my mortgage until my current deal ends in 2027 as the interest rate is only 1.33% so better to put the money in savings. Aside from that he suggested Premuim Bonds (I’ve read mixed reviews), the ISA and paying the max amount I can into my pension.

I’m due to reconnect with him once the money comes through but in the meantime I was wondering if anyone had personal experience of investing higher amounts over the long term and what worked out well?

I think what you would do is invest the money in some sort of medium-risk fund, and move £20k per year across to a S&S ISA. You wouldn't pay any tax as CGT would only be due when you sell the stocks, which you don't need to do just yet and by the time you do, a lot more of it is in the ISA.

Good advice from the IFA on premium bonds- you are one of the rare people for whom they would be a good option. You can put the full whack £50k in meaning you're likely to receive about the rate they pay (on average) which will be 3.6% from next month. They key point is that you don't pay tax on winnings, so your (rough) 3.6% is equivalent to getting you getting 6.5% in a savings account, completely risk free.

Also good advice to hold off paying the mortgage.

What's your annual limit for pension contributions?

Our view has always been to reduce the mortgage whenever we can - especially when we had a larger mortgage (as we would have been left very vulnerable remortgaging when mortgage rates more than quadrupled). Maybe do a pressure test to see what your monthly mortgage payment (if keep it at same total borrowing) would be if new mortgage rate was 7%, 6%, 5%, 4%, 3 %.

Would a medium-risk fund need a certain number of years to ensure that there has been growth (rather than a loss?) (Is it around 8 years or something?). I didn’t think stocks / shares were particularly suitable for short-term investments, so if you are planning to pay your mortgage down in 2027, then stocks and shares for the whole lot might not be such a good idea. I am not a financial advisor though - maybe the medium-risk portfolio mentioned above would mitigate some of that, but I don’t know!

I think putting in £20k each year to an ISA is a good idea.

Also, there is a limit of £85k per person that is protected (in terms of if banks fail), there are lists of associated banks etc, so if you are putting it in banks / building societies make sure you choose ones that are not associated / linked (as only £85k woukd be covered).

What are the terms of your mortgage? Ours always allowed an over payment of 10 per cent per year without penalty; our last one also allowed a regular monthly overpayment up to a certain amount without penalty. After overpaying, if you keep your monthly mortgage payment the same then it continues to chip away at the outstanding capital owed (if your mortgage allows this).

We had a similar situation (were tied into a fixed term mortgage, so couldnt immediately pay it down), so used ISAs, plus an account with NS &I (as it was an okay interest rate, and the whole amount was protected, not just £85k), and paid down what we could on the mortgage until the fix ended then we could pay more down. If you have the time, you could find various banks etc that pay a better interest rate than NS&I (would prob be for a fixed term), and spread the sum over 5 different banks / building societies.

How much will the loft conversion cost? It might be that you need to keep a small mortgage balance to do the loft conversion, but that might be manageable to overpay monthly / yearly and get it paid off quickly after that.

I think you need to decide what your long term plan is first - are you going to use the money to largely pay off your mortgage, or are you going to invest it long term in the hope that whatever returns (after tax / NI / additional student loan payments due to your increased income from interest / dividends??) are better than whatever the mortgage rate will be on your mortgage at the time. Or a mix?

If you intend giving some to your Dc I would look at any benefits of diverting it direct to them in. Deed of Variation. Mostly IHT benefits should anything happen to you in the next 7 years.

A DoV is very easy to do, you can find templates on the internet, basically a letter that tells the executor that as a beneficiary of the estate if Yyy you would like £xxxx to go to your named Dc.

And get it witnessed by someone not involved

@RantzNotBantz We knew of a teenager who came into a chunk of money in their late teens - within a year it was completely gone. I know this wouldn’t always happen, but you just never know! (The sibling also got the same sum, and that went towards a house deposit later on…)

I think my allowance is the standard £60,000 a year? I read that I can get tax relief on private contributions of up to £3,600. I have a workplace pension (Aviva - I pay 5% of salary, employer pays 7%) I also pay £300 per month into a pension managed by St James Place. The IFA was unimpressed with SJP’s advice - he mentioned I should have been paying the £300 into my work pension to benefit from reduced NI contributions.

In any case, he advised that pay the maximum amount possible from my salary and pay myself back any money I need from the inheritance.

My niece is due to inherit a similar amount (her dad was my late brother so his share goes to her) and her mum is absolutely worried sick that DN will blow all the money. She is in her 20s with two young DC but emotionally immature, slight learning difficulties vulnerable and surrounded by hangers on and a waste of space ‘D’P. I was going to open a separate thread in Legal asking if there is anything that can be done to protect her from herself so to speak. But I suspect the answer is no unfortunately.

Don’t pay off the mortgage yet, as the interest rate is so low.

SJP should generally be avoided like the plague (although their salesmen are very smooth, they almost convinced me once!).

How much do you currently have in your pension? Given the tax relief, I’d be paying the most I can (reserving whatever you may need prior to retirement) into that - you can carry forward relief from earlier years if you haven’t used the full 60k.

Edited to add: paying into your workplace pensions to save NICs (salary sacrifice) is good advice, but only if Aviva offers suitable funds (many workplace providers (looking at you Nest) have truly awful fund choices, and what you save in NICs you may lose in underperformance).

I currently have a medium risk Hargreaves Lansdown S&S account so can put £20k in there there tax year.

According to my mortgage app, I can overpay a maximum of £64,000. But as mentioned, my current deal doesn’t expire until 2027 and the rate is 1.33% so I think better to save the money until then.

Quote for the loft was “between 65k - 85k” depending on what we want done. I did look into if it would just be cheaper to move!

I would focus on investing if your mortgage rate is that low with a view of reducing the mortgage in 2027 as you won’t get 1.33% then. In the meantime I would use your ISA allowances, maybe overpay your pension and maybe a fixed term investment to come out in 2027. Remember to spread over various financial institutions to keep under £85k limit in case of banks failing. Unlikely but you never know

I would do the Rebel Finance course on YouTube. There’s also a very helpful and informative FB page.

Premium Bonds are a good idea if you’ve maxed out your ISA allowance and are a high rate taxpayer as all winnings are tax free.

If you are going to clear/pay a large chunk of your mortgage off in 2027 it’s a risk to invest in S&S - you really need to be looking at 5 years minimum to ride out any market volatility. Instead have a look at fixed rate bonds and lock a decent chunk away for 12/18 months and out the rest in a mixture of instant access and notice savings accounts to max out your interest.

Eg:

£25k in instant access - you can get 5% with Chase if a new customer (though rate drops to 2.75% after a year.) Or Atom are paying 4.6% if you make limited withdrawals.
£50k in Premium Bonds
£125k in a notice account - you can get 4.7% on a 95 day notice account with RCI Bank
£200k in a fixed rate bond - you can get 4.47% on a 1 year bond with Zenith Bank

All rates from MSE - https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

I know it is possible (in a will) to plan to have a trust set up, where there may be issues about capacity to manage money. Probably a good idea to do a separate thread on this issue, see if anyone can give advice. Might the solicitor dealing with your late parent’s estate be able to advise on this, also? Ps - sorry for your loss..

overpay the mortgage, use the leftover payments to boost your monthly income and salary sacrifice into a pension to bring you below the 45% bracket. The IFA will want you to invest and pay his fees.

me..... I'll have it. I'll figure out how to spend it, lol.

There is every good reason to pay off asap as much mortgage as you can without penalty. And to increase your pension contributions asap. Possibly consider a private as well as employer pension. Otherwise I'd aim for diversity in the investments. Diversity of level of risk (some higher, some lower, always only in financial products that you understand) and probably not in property because you're already exposed to property market highly by being a home owner. If you nver had anything but "small" amounts in savings. I am guessing that "small < £10k" : you could keep in cash ISAs an amount = half of your net annual income, so that you have a decent safety net.

General rule of thumb is that if you can get a better rate of interest in savings than the rate you pay on your mortgage then don’t bother overpaying/paying it off until the fixed rate ends.

If the reverse is true - high mortgage rate and lower savings rates - then you concentrate on paying the mortgage off.

I would work out what you have paid into your pension in the last three years and pay in any remaining allowance (it is 60K a year so the total allowance is 180K). That would give your pension a nice boost.

Then if your priorities are a loft extension and paying off your mortgage (albeit in 2027) - I would keep the rest in cash. 50K in premium bonds, 20K in cash ISA or in short term money market funds in your S&S ISA, an easy access account to cover the loft extension amount, and the rest split between a 1 year fixed rate bond (with interest paid next tax year) and a 2 year bond (with interest paid on redemption). If you remain in your current job, you will pay tax on the interest, but if something changes, it means the interest is spread between tax years (eg if by year 3 you are in a lower paying job or eg have gone part time), you may have a tax-free allowance. If you have a partner, they also have an ISA and a premium bond allowance, and you can use yours next year too.

It seems sensible to pay off the mortgage in 2027 as it is a large mortgage and will increase a fair amount presumably then. Then maybe divert the mortgage payments to increased pension contributions.

The general rule also doesn’t take into account how stupid the cost of living is at the moment. OP could be living at the same standard, but without a mortgage to pay for and with extra money going into her pension! She’d no doubt end up better off in the long run

Quite possible, without knowing the OP’s full financial situation, but she says she’s a higher rate tax payer - so obviously earns a decent amount - with no other debt, and if she’s on a fixed rate mortgage odds are there will be an early repayment charge which could eat away any benefits of paying off early.

Like I said, it’s a general rule of thumb, not gospel.

Completely agree with everything @SlipperyLizard said.

I note you've mentioned children but not a spouse. If you are married and have joint finances then it's worth considering their allowances (ISAs and premium bonds) plus what their pension provision looks like currently and how their tax status might affect any decisions made.

In relation to providing for your children, when would you want them to access the money? Using a JISA means it's tax free but they'll have access to it at 18. Going in the opposite direction, you could set up a SIPP for them and get tax relief but this won't be available for them until they hit 57*.

I know a few people using their pension drawdown to help their children as it will be at the right timing for things like house purchases so another potential reason for maxing out your own pension contributions.

Your IFA will mention it anyway but you should be thinking about IHT planning - if your estate will exceed £1m then this matters. As a pp suggested, you could look at a deed of variation to pass on money to your children directly now.

Couple of other things to consider. You mentioned not having much in savings generally; you could use your lump sum to ensure you had an emergency cash buffer of 6 months outgoings. That, together with your planned extension and car purchase will mean £100-150k in accessible funds. It sounds like you're comfortable with the rest being longer-term, therefore how comfortable are you with risk?

You have lots of options! I don't want to make a fool of myself talking about things I'm not certain of, so I'll try to keep it to the thing you genuinely asked about - investing.
There is alot to be said for adding a ton of cash to your pension (I suspect that you'll be able to add alot more than £3600 given that you're working full time and presumably on more than £125k because of your tax rate) and there is alot to be said for paying off your mortgage. You don't have enough here to do both anyway, given the loft conversion. So that's all up to you and your preferences.

In terms of investing over the next couple of years, I think that it is easy enough for you. You are probably comfortable with Hargreaves Lansdown, so just stick with them. You've got your ISA, but you can also set up a dealing account with them and put a large amount in. This will work very much like your ISA, but you'll pay tax on any profits at the end of the tax year. They'll give you a statement which will help you with your tax return. I'd suggest you personally pick out 3 'ETFs'. One for North America, maybe one for Asia, one maybe focused on something you think appeals to you, eg healthcare, AI, whatever. I think it would make sense to pick something slightly different to the existing investment you have with them through your ISA, to spread risk and increase your understanding. Each ETF will have maybe 100 different shares in it, then if you go with 3 different ones, you will have a real spread of risk so won't get too many highs or lows overall. Everyone accepts different levels of risk, but I wouldn't have a problem investing along these lines with a 2 year horizon rather than 5 years if I was in your shoes.

Chances are you'll make 5% - 12% or so in the course of a year - far more than in Premium Bonds, but not guaranteed. A mix of capital growth and dividends. You get the first £3k of capital gains tax free, then maybe pay 28% or so on anything above that. Dividends, I don't remember the percentage.

As for interest on cash, either sat in a savings account or in Hargreaves Lansdown, just remember that you'll end up paying about half back in tax at the end of the year. So for 100k at an interest rate of 3.5%, you'll earn £3500 over the year and pay back 45% = £1575.

Oh, and if you're looking at paying down the mortgage, remember it doesn't have to be all or nothing. Paying off a chunk to bring you down a threshold, ie. from 60% to 40% LTV may mean you can get preferential interest rates.

This means you get the psychological boost of paying off a portion of your mortgage while also keeping cash in other investments where you may get a better return.

Many of my colleagues think Aviva is terrible and have been moving at least some of their money elsewhere. We (employees) have just been informed that Aviva is moving our funds to a new default fund called My Future Focus Long Term Growth Fund. I have to look into what this is.

Yeah I’ve now read that there are quite a few issues with SJP, specifically when it comes to withdrawing funds, but as you say their salespeople are quite slick and I don’t think I did enough research before investing with them. That said, the pension has performed quite well in the year I’ve been with them (+17k) but who knows what the future holds. My SJP advisor seems quite limited in the scope of advice he is able to give, hence my connecting with the IFA who was quite scathing about them.

Currently have £56k with Aviva and £129k with SJO. I definitely haven’t used the full allowance from previous years so good idea to carry forward.

OP, you don’t need to answer this but just to flag, do be careful with mingling an inheritance with your marital assets if your marriage is maybe ‘less than perfect’. If so, I would get some separate legal and financial advice and the advice given might be different if you are in that situation.

Of course, nothing in your OP to flag this but wanted to mention it just in case! Otherwise you have received some really great advice already.

This is great advice. I would suggest not giving any of this cash to your children yet - at 18 they would have full control of it, and I’m not sure you’d want them to have what could be a considerable sum so young. In 10 years you’d have £200,000 in a S&S ISA and the £400,000 could be looking very healthy.