Pension - Inheritance

[ohpumpkinseeds]

I am extremely fortunate to have inherited a really significant amount of money - £300k. I am going to see an IFA but I wondered if you wise lot could give me your opinions.

I currently don't have a pension. If I was to whack the whole lot in a pension, could I just leave it in there and not add to it from my wages and have a decent pension by the time I retire?? I'm 36.

I would be aiming to retire at 60, and I'd have no mortgage by then so it would just be other living costs etc. We could also downsize and release cash that way when retiring. My kids are very young but already have savings funds that will amount to enough for support through uni, first cars, a contribution to house deposit etc.

I know it's a bit of a "how long is a piece of string" question! But interested in opinions! Thanks so much.

You need an ifa but I think 300k in pension pot terms isn't a lot. It also depends on what you expect as a pension taking into account the time that'll past 30k a year in 25 years may not be much.
It's probably a good start but you'll still need to keep building on it.

(Then a year before you retire you get run over by a bus and don't benefit at all)

there is a maximum annual allowance of £60k pa on which you can claim tax relief . It is quite complicated so you’d be best to get independent advice as this allowance is reduced depending how much you earn and if you are already putting in employer and employee contributions.
A mix of investments would be ideal. Make use of your isa allowance and make some overpayments towards your mortgage ? Keep some aside so you can max out for a few years on the pension contributions. The tax relief would be silly to waste.
Maybe spend some and enjoy some it while you are fit young and healthy if you are in strong financial situation already.

Thank you. I thought it would increase in the 25 years until I retire because of the interest, so it would be a much bigger pot.

I'm just trying to prepare myself a bit for what the IFA might say in terms of the amount I'll need to be contributing each month I think! It seems like such a large sum of money!

I'm inheriting it from a pension so it'll just come directly into a pension of my own if that's what I want to do. I've been told that means I don't need to worry about the yearly limit of what I can put in one go. I'll double check this with the IFA though!

300k in pension pot terms isn't a lot. It also depends on what you expect as a pension taking into account the time that'll past 30k a year in 25 years may not be much. It's probably a good start but you'll still need to keep building on it

£300k invested now and earning a moderate 4% interest will turn into over £750k by the time op turns 60, without her ever having to add another penny.

It's 'enough' by most people's standards.

Yes you could put the 300k into a pension (although PP explained that it’s best to get the full tax relief so spread it out over a few years), and it would (hopefully) grow, and you’d have a lot more pension in 30 years!

Probably the best option is to use the 300k in a combination of ways to best maximize your money overall as a family unit.

So for example yes pension contributions is a good option, also possibly paying off some of your mortgage or investing into an ISA or other investments. Spending your 300k on those things might help decrease your outgoings or increase your income and that could free up more money for you to pay into your pension each year so that you can claim the maximum tax relief.

If you put the £300k over the next few years (there is a £60k per year limit) you would also get the tax relief on it so at least another 25% but more if a higher rate tax payer. That should be a very healthy pot to grow to retirement at 60. Especially if you could keep up a regular monthly contribution as well.

Ok just seen your update, I’d still get specific advice, but yes if you don’t need the 300k immediately, then transferring it into a pension of your own seems like a good option.

There could possibly be tax penalties if you DON’T keep it in a pension wrapper. It will depend on the type of pension and age of person you inherited it from I believe.

It will grow. And considering you currently have zero pension, it will definitely provide a decent pension for you. You can always add to your new pension too if you want to.

It’s an excellent idea and you will have a decent pension pot in 20-25 years or so.
Remember to make a will and do it soon. It’s too easy to put it off.

I think leaving it in a pension would be a good plan OP. I think that would be tax free if you keep it as a pension, and tax free if the deceased was under 75 and you want to cash it in.
If they were over 75, i think you might pay tax if you cash it in, but free if it stays as a pension.
Pensions are tax efficient/free when you’re putting money in them, but they do like to impose a hefty tax bill for taking money out…I’m no expert, but we recently redid our wills and we did talk about what happened to them if we died before retirement age and from what I remember, pensions pass inheritance tax free.
FA definitely the way to go though!

OP doesn't say it's currently a pension

To add: the £60k includes the government top up, so it will take a few years to get it into a pension (although you can also use your unused allowances from the last 3 tax years). If possible try to do it this tax year if you're planning to do it to utilise the allowances from 2020/21 until now (limit was £40k previously)

So you will have some you can't yet put into a pension (it's highly penal to do so over the annual allowance). I'd max out a stocks and shares ISA, put some in premium bonds, keep some cash and maybe invest the rest until you can move it to the pension.

You don't state exactly who you are inheriting this money from, or the source of the money. This may impact how much you are allowed to put into a pension.

In any event, as others have said, it's worth keeping some for rainy days that happen before retirement age, I suspect.

Speak to your IFA for sure.

@user146990847101 sorry, my mistake - I missed later update!

^(Then a year before you retire you get run over by a bus and don't benefit at all)^

So have a will written up so that your kids benefit.

Thanks so much everyone really appreciate all your replies!

Put £20k in a stocks and shares isa before 5 April and another £20k on 6 April 2024 .
Money withdrawn from an ISA is tax free.

Research relevant earnings for pension , it is the maximum amount of your earnings each tax year that qualify for the government tax "top up" £60knia the maximum including employers contribution, it will take a few years to move into a SIPP

You may be best to combine pension and isa savings each year.

If it's part of a pension you are inheriting and the person who died was under 75 you can usually take the money tax free. If the person was over 75 then you will pay your usual rate of tax.

Talk to an IFA and take advice on your investment options.

Something like a Vanguard managed fund - you can choose a few different fund types (eg UK shares; international infrastructure, etc) and set it that the dividends reinvest back into the fund. You will then get a natural increase over the years due to buying more into shares over the years and also an eventual unit price increase over the years (it will go up and down but over time should go up).

Don’t invest it all in a pension. Do some, save the rest.

I would have thought that you’d be better using a substantial amount to pay off / reduce your outstanding mortgage, then max out your pension contributions - this will do 2 things. 1) your tax bill will be lower as pension contributions are taken out before income is taxed. 2) your employer will be adding to your pension contributions therefore increasing what gets paid into your pension pot.

With your pension remember the carry forward rules enable you to use any unused annual allowance from the last three tax years (allowance includes any employer contributions)

I think it would me more tax efficient to pay a significant proportion of your wages into a pension and not pay tax on them.

I'd open a Lisa and stick £4k a year in there too

You can get tax relief even if you don't make payments through your salary. The government automatically tops up 25% (ie a 20% gross up) and you can get the higher rate amount, if applicable, through your tax return.
Pension contributions are tax efficient no matter how they are made.

I was wondering if this might be something to consider - live of the inheritance whilst getting the maximum tax input into your pension based on salary.