Clueless £25k

[Marypoppins19]

So we are a family of 4, bounce in and out of our overdraft every month, not had a holiday for around 5 years. Both work full time and all our evenings are spent running around with clubs and activities for our teenagers.
We have child trust funds set up for the kids, about 1k emergency funds in savings account.
Have another 16 years on our mortgage and a BTL which we over pay and will be a pension as DH doesn’t have one. We have another 20 years on that. We are both 40.

We are I guess always on a bit of a tight rope and never feel like we have got money right.
One of our parents is in a position to give us £25k. We have no idea what best to do with it and don’t want it wasted or swallowed up. Do we have to pay tax on it?

Any advice gratefully received

I agree with the steps the others have said. My job is writing about investing and I'm a big fan of stocks and shares ISAs. But stock markets are difficult at the moment.

Normally I'd suggest investing in funds but they've been hit by the fall in US stock markets and some of my funds have fallen by 30% in the last few months. The U.K. has been more resilient but, with high inflation and rising interest rates, it may well go down further. Even my "cautious" funds have gone down in value.

You've got time on your side for ISA allowances (until April next year) so I'd sit tight for a bit on share based investments. You can also pay your ISA contribution into a S&S ISA but leave it as cash. It doesn't earn interest but you can then invest it when you want. Monthly drip feeding is another way to smooth out volatility.

Investing in the stock market is great, and I've made around a 20-30% average return in good years but it's not so good if you need quick access to the money during one of the downturns.

That said, if you put it into a savings account paying 1.5%, with inflation forecast to hit 10% this year, the 'real' value of your money is decreasing by 8.5% every year. The braver investor may also see lower share prices as an opportunity to buy at a lower price.

If you are looking for a S&S ISA, Hargreaves Lansdown and AJ Bell have lots of ideas for building a portfolio.

Just to add, personally I choose not to pay off my mortgage. I pay 0.99% interest on my mortgage and I can make quite a bit more than that by investing the money in my S&S ISA. Plus you can withdraw ISA money at any time, whereas it's gone if you overpay your mortgage.

As an entirely separate suggestion, you might get your teenagers involved in researching options for their child trust funds, perhaps over the summer. These can now be transferred to junior ISAs, which potentially has two advantages. One, there is a greater variety of products out there so you may find better rates / other investment options. Two, when the owner turns 18 they can turn into adult ISAs fairly smoothly.

I'm not saying these accounts must or even should be moved, but it is possible that it could be a good idea. The big role for these accounts was meant to be supporting meaningful financial education for teenagers, so encourage them to start learning (if they havent' already of course).

Good luck finding the right answers for your family finances. Lots of good suggestions here.

im not a financial advisor but just because you can’t afford to contribute enough to a pension to make it enough to live on doesn’t mean it isn’t worthwhile contributing at all. He will be getting the tax relief so for every £1 he puts in he gets £1.25 in his pension pot more if he’s in higher rate tax. Granted he’s prob made more on the increase in equity in the house but now he has this spare cash I’d seriously consider putting some in a pension, even if eventual pension is not enough to live on it’ll be another source of income to add to money from the house rent and state pension

You received utterly terrible advice about the pension. What's your BTL mortgage rate? 3% 4%? You're in essence deciding 4% is higher than 20% (the tax break from pensions)..

Not an apples to apples comparison - mortgage interest is a cost, the tax break is income. By that logic if his mortgage rate was 20% he would be ok?

And sure, with pensions you get a tax break when the money is invested but (apart from the first 25%) you need to pay tax on it when you start t draw down.

Also, he's technically leveraged with the extra mortgage so I imagine the house price increase of his BTL is running rings around the fund value of a pension pot with those same contributions.

Hi OP,
I think I have a slightly different take on this than previous posters. Rather than worrying about pensions and investments too much my first priority would be what can I do to plan for my kids needs and get us a holiday (each year if possible) having not been on holiday in 5 years. If they are teens in another 5 years they will be young adults maybe have left home.

You should of course continue to pay into your pension as standard (through work?) and continue to pay off the buy to let. If the BTL gives you 8k a year after costs (before tax) that is 8k to add to your state pensions and your private pension when you should be mortgage free and less/no kids costs.

The buy to let mortgage has 20 years to run. Is it interest only? The most I would aim for (if it is realistic) is to work out payments to pay it off over the 20 years (you would be 60). If that's not realistic pay a fixed affordable amount each month and refinance at 60 when the mortgage expires.

Don't overpay your own mortgage. It finishes when you are 56 anyway. You can't afford to.

The kids
Do they get pocket money? My son is 12 and gets £30 a month into his bank account. He can choose how to spend it to a great extent but he does go through us so we would try to dissuade spending too much on online coins for example. When he asks us e.g. for £8 app I would say it would come from your money he often changes his mind! He would eat Dominoes/subway every day we tell him we will get him one a week. More than that he has to pay himself but remind him of the effect of that on his money. At birthday/xmas if he wants a large ticket item we put £100/£200 towards and he has to save the rest. We have also told family when he is saving for a guitar/computer could he please have money towards it rather than gift. Make sure the teens know money is finite.

Encourage the teens to get jobs at 15/16 to top up their spends and hopefully save some. Have an amount you will pay for trainers/jeans etc and more than that they have to top up.

How much is in the trust funds? If it is more than 2k I would stop adding to it. They gain control of it at 18 and could spend the lot on a summer in Ibiza!

Driving lessons/car/insurance
I would put 2k of the money aside for each child (you have 2 I think) towards these. Be open with the kids that they have 2k each for this. If it pays for their lessons then they will need to save for their own car. If they work and pay for their own lessons it will be there for a car. Realistically they will probably need to pay their insurance monthly if they are working or wait to get a car until they are.

Uni. Depending on your household income you will be expected to top up your kids income if they go to uni. You need to look into this and understand it. Money Saving Expert site has some calculators. Uni is another reason it is a good idea for your kids to get a job. National chains will often help students transfer their job to university city. Job experience will help them with future work. Decide what chunk you are going to set aside to help with uni (don't give it to the kids - it is a float e.g. for property bonds, paying rent while waiting for loan etc) e.g. 2k each.

I would set aside a chunk for a 3k holiday each year for the next 5 years. 3k x 5 = 15k.

It is important what the giver intends of the 25k - why not run your ideas past them. Do they think a holiday is "wasted" money or do they want to give you the money for exactly things like that as they can see you haven't afforded holidays?

My budget idea:
3k holiday for next 5 years = £15k
2k each cars pot =4k
2k each uni pot = £4k
2k left added to emergency fund.

No more CTF payments, no unneccessary overpaying. Put some responsibilty onto teens to earn towards their spends and to moderate their spending.

With the cost of living increases you are going to have to budget hard if you don't want the money to leak away on bills.

Good luck. Nice problem to have! (how to spend 25k)