Advice on Inheritance Investing

[AlwaysFloofy]

Just this week I have inherited £50k from my recently deceased sibling. Quite unexpected and it has left me feeling a little overwhelmed.

To give a little background, I am 52, married with 3 teenaged children. We live in a small but now mortgage free house. DH and I are low earners but managed to pay off the mortgage early by overpaying an offset mortgage (we had a small inheritance 16 years ago which enabled the offset to work in our favour).
No other debt of any kind.

I work 30 hours a week in a NMW role which suits our family set up, close to home and school. I have a very, very small pension which I set up in my early 20s and paid into minimally until I had DC 1 19 years ago. The yearly forecast says it will pay £180.00 per month at 55 (if I want to take it then). I also have some other workplace pensions which desperately need rounding up to take a proper look at. All in all, not much.
Making money stretch to our non extravagant living costs has been all we could do.

I would love a bit of advice of what to do with about £40k of this inheritance.
I'd like a little to make a few home improvements and have a little to spend and possibly go on holiday. Probably not the full £10k but can look at that later.

Would loading an ISA before the new financial year and another after April 5th be a good idea?

I have also looked at the investing options on my Monzo account, but I'm rather frozen by fear of doing the wrong thing. This is a life changing amount of money for me.

Advice and opinions welcomed.

I’d start with building fully funded emergency fund (3-6 months of bare bones expenses) which is easily accessible…then max out your ISA allowance, either cash or S&S, whatever you’re comfortable with.

If any older over maybe look at SIPP, but it all depends on when you’re hoping to retire.

I would put 40K funding this years and next ISA. Invest in a monthly interest cash ISA will give you £130 monthly additional income. The £10000 can go into an instant access for holidays, home improvement and emergency fund.

The monthly £130 can go on treats or just added to your income, but it is nice to treat yourself.

Yes, if you plan to leave it for 5 years+ (& supplement your retirement income), I would use 2 years allowance in S&S ISAs.

Sorry for your loss.

put £20k in trading 212 ISA. I’ve made £1000 since November. Leave it in there for 10 years and you’re laughing.

Stocks and shares ISA get it all in as soon as you can then see if it will pay you what your pension would at 55 so that you can take your pension later.

Get that 40 into an ISA as soon as you can. Future you will thank you!

Presumably you intend to work until SPA?

Are you opted in to your work pension? If not, then enroll and drip enough into your pension each year to get the employer contribution - ie pay into the pension from your salary and take the same to live on from that £40k. Keep the rest iin an ISA whilst you do that so that you get the tax-free investment growth - but keeping your 3-6 months emergency fund in a high interest savings account and using that as a buffer so that you don't withdraw from your ISA when the market has dipped.

You should aim to get the £40k (and anything else you can spare) into your pension whilst you're working, in order to get the tax benefit. Do make sure that you drip it in and don't reduce your earnings so much in any one year that you don't get the NI stamp, if there's a possibility you won't get enough years to get the full state pension. That's currently 35 years, but I wouldn't be surprised if it went up to 40 years at some point (but we should get enough notice to make up the extra years). BTW, if you're not going to get enough stamps for a full state pension, then buying those extra years is the best use of that money - but not if it takes you above 35 years by the time you retire.

If there's a possibility you (or your DH) will go into the higher tax threshold before you retire - bearing in mind that tax thresholds are frozen and inflation is currently 3%, so your salary might be 50% higher by the time you retire with the same spending power... and possibly tax thresholds unchanged - then keep enough back in an ISA that you can transfer it into your pension closer to retirement to avoid the 40% tax.

S+S ISA now, and again after 5th April is what I’d do.

Wow! This is fantastic!
Thanks for taking the time to read and reply all. I really appreciate it.

I’ll take a closer look at stocks and shares ISAs and also a bit to think about and research from strawberrybubblegum’s suggestions. Thanks!

S&S ISA! Not a cash ISA.

Join the rebel finance school on fb too!

Another recommendation for a stocks and shares isa - Vanguard.

I definitely would not put it on stock market in these volatile times. You need to keep it for 5 - 10 years to get a return and charges may apply, You don’t have enough capital to go that route. maybe put up to £5000 in there if you don’t mind a gamble.

I'm rather frozen by fear of doing the wrong thing. This is a life changing amount of money for me

Then take your time.

As pp said, you need 3-6 months of minimal expenses - not wages - in a high interest easy access savings account (Money Saving Expert is a good guide for choosing such an account).

You don't need your inheritance to provide income now, you want to invest it for growth to provide an income in retirement.

Invest £40k in a passive S&S index fund with low fees and - with the magic of compound interest - you will be in a very good position in 10 years time.

You probably don't have a clue what I'm talking about (I didn't until two years ago!) so I recommend you go on YouTube and look at Rebel Finance Business School. It's an excellent - and free! - resource that demystifies savings, investments and pensions.

Is your current work pension a defined contribution or a defined benefit? If it's DC then I'd set up a SIPP (self invested personal pension). If you put the whole £40k in, you'd immediately get an additional £4k added in tax relief. Then you can consolidate your old pensions by moving them into your SIPP.

You and your DH are obviously pretty savvy if you've paid off your mortgage at 52 whilst raising 3 kids so I've no doubt you'll be smart at investing your inheritance.

She most certainly does have enough capital to invest. Yes, it needs to be invested in a S&S fund for 5 to 10 years to ride out market volatility.

She's early 50s, managing day to day but with little pension provision. After pension age will have the most impact on her life (and she can take out of her pension from age 57 if she needs it earlier).

She has 15 years until she reaches SPA. Even significant market crashes have historically recovered within 5-10 years, and usually it's less than 6 months. OP - the important thing is not to panic and sell if your fund goes down. If you leave it alone, it will go back up again - but if you take it out you lose the money. That's why you should make sure that you've got enough money in interest-based savings that you can leave your fund alone for 6 months if it drops.

The usual advice is to move about 30% into bonds 5-10 years before retirement. OP, I think you should think carefully about whether you would take an annuity at retirement or leave it invested for draw down. Draw down would give you more flexibility, which could be useful with a smaller pension: if you need more money for an emergency, you just take it - then you take less later to make up for it. The disadvantage is that it isn't a lifelong income, so there's a possibility it could run out. But you're in the great position of owning your home, so that gives you an amazing safety net. It won't be counted for government help, but if you needed to then you could borrow against it as a last resort (think very carefully before doing that - it really should be a last resort!) so you don't need to worry so much about your pension running out if you live to 105! Draw down would extend your investment horizon. You probably wouldn't want a full 30% of your money outside investment at SPA - since you're keeping some of that money to take out in 20-30 years time!

Keeping it in a savings account (eg cash ISA) is a huge lost opportunity with that timeframe. Inflation is the killer of wealth. It's currently 3%, so even a 4.5% interest account is only 1.5% real growth. In 15 years, her £40k would have grown to £50k (in equivalent spending power to today). If she was daft enough to leave it in a standard savings account at 1% it would have become less valuable - it would only be worth £29.5k in equivalent spending power.

Compare that to a fairly conservative 5% real growth for the ftse 100. In 15 years she could expect her £40k to grow to £83k in equivalent spending power to today. That's a big difference! And when you extend the horizon to 30 years - ie if she leaves it invested after retirement and just draws it down as needed, then the difference is £62k if kept in a 4.5% interest account versus an expectation of £172k if invested (real terms - ie at today's spending power)

On top of that, if she does drip it into her pension that's an extra 3% of earnings from her employer (which is huge!) and 5% tax saving due to her tax-free lump sum

If you put the whole £40k in, you'd immediately get an additional £4k added in tax relief

Where is the £4k figure from?

It depends on how much she earns and how much is currently being paid into her pension this year. You can get a tax uplift on a year's pension payments up to the lower of your earnings or £60k. Someone earning say £30k can't put a whole £40k into a personal pension in one year (well, she could, but wouldn't get the tax benefit).

Do you currently have any savings/emergency fund. Have you considered what would happen if you became unemployed or got too sick to work. This is an important consideration. In an ideal world we would all invest for or pension but that. Money is locked away.

This is really informative, thanks for all these replies,

We have always had a buffer to cover six months worth of all essential bills plus enough to pay for a new boiler/washing machine/fridge etc in an emergency, so not a pressing issue.

I suppose I'd really like to have a plan which would enable me to have some sort of retirement/semi retirement (maybe from age 60ish) which I had not even been able to consider previously.

If you put the whole £40k in, you'd immediately get an additional £4k added in tax relief
Where is the £4k figure from?

Typo! Should've said £4k on £20k. Yes to all your caveats.

"You should aim to get the £40k (and anything else you can spare) into your pension whilst you're working, in order to get the tax benefit."

This is really bad advice. Don't put it in a pension.
Right now what you have is tax free and you can put it in an ISA and all growth and income from it will be tax free.

If you put it in pension now, you might get some tax rebate on it, but it will grow a lot during the time it's in your pension fund and you'll only be able to take 25% of it tax free. You will be taxed on the remaining 75% ( which will be a lot more than the tax rebate you get when youput it into the pension)

Please put it in a stocks and shares ISA the it wi tax free when you withdraw it.

As I've said several times, the idea is to drip it into her pension by putting some of her salary into her pension each year - hence getting the tax relief - and living off an equal amount of the £40k to replace the salary she's putting into her pension. Not putting it in all in one go. And being careful to stay above NI limit.

By doing that, she gets the tax relief on the money she pays in from her salary. She'll pay tax when she takes the pension out, but it will be at the same basic rate as she originally got tax relief on, so that makes no difference. Except she gets 25% of her pension tax free. That effectively reduces her income tax rate from 20% to 15% on all the money she puts into her pension (doesn't sound like she'll hit the cap).

If she's currently opted out of her work pension because she can't afford to contribute, then doing this also means she'll get the employers pension contribution, ue a minimum of 3% of her salary extra, going into her pension.

Why do you think the tax paid on the way out will be more? I mean, it will be a larger number because it's taken after growth, but since it's the same percentage - after growth of the gross amount - it makes no difference to how much total money she gets. Do a worked example to see for yourself!

The exception would be if she paid basic tax whilst working but then higher rate tax during her retirement. That would be very unusual though, and in this case it doesn't sound like her pension will take her into higher rate.

If she's hoping to reduce hours (taking her below the personal income tax allowance) or retire early, then it's even more favourable for her to have it in pension instead of ISA since she will be able to use up her personal allowance from those years until SPA (at which point the stare pension uses up your whole tax-free allowance)

The down-sides to dripping the money into the pension as I've suggested are:

a) The money is tied up until a government-set age, which is currently 55 but will go up to 57 in 2028, so I believe that's the age which will apply to the OP
The OP should mitigate that by carefully choosing the timing for moving money from ISA to pension such that she does get the employer pension contribution and does get the money across whilst she's working and paying tax - but also has sufficient money outside her pension to cover her needs in the next 5 years, during which time she can't access her pension. She should also be aware that once she starts withdrawing her pension (which must be after age 57) that limits how much more she can put into the pension each year. But given the amounts she says she's investing, the limit probably wouldn't affect her anyway

b)The government can change the rules for pensions.
I'd consider this risk fairly low for the OP because it's only 5 years until she can access her pension, and with a low income and small pension she's in the group the government will try not to harm with any changes
- The lump sum maximum might go down. £100k lump sum (£400k pension) has been mentioned, but OP has implied that her total pensions are below that anyway
- The age to access the pension could go up further. But it's likely that the government would give more than 5 years notice
- The rate of pension tax relief might change. If it does, if anything it will change in OP's favour as a lower rate tax payer. The possible changes which have been mentioned are either to cap the relief at 20% or else to set 30% tax relief for everyone. If she or her DH start paying higher rate tax before retirement, then she should re-consider which of them makes pension payments - and when - as any changes are announced

c)If she uses her company pension scheme rather than a SIPP in order to opt in to her company pension and get employer contributions then she has less control over fees and investment choices than with an ISA or a SIPP
She should mitigate that by finding out about her company pension scheme and choosing an investment profile that reflects her risk appetite (they are often quite cautious - especially when approaching SPA). She could transfer the money into a different pension later if she chooses.

If you put it in pension now, you might get some tax rebate on it, but it will grow a lot during the time it's in your pension fund and you'll only be able to take 25% of it tax free. You will be taxed on the remaining 75% ( which will be a lot more than the tax rebate you get when youput it into the pension)

Thinking about it, I can understand why you've made this mistake. It's important though, so I'll give a worked example.

Say you inherited £40k and were deciding whether to put it in ISA or SIPP.
If you put it in the ISA, the ISA will have £40k. If the ISA value doubles by retirement, you'll have £80k which you can take out at any time. There's no tax on the growth, and no tax to pay on withdrawal. You get 80k

If instead you put £4k from your salary into your pension each year for 10 years, getting the tax relief. Without growth, your pension would hold £50k because of the 20% tax relief. In the same funds, it would likewise double by retirement to hold £100k (minus the trading fees to move from ISA to pension which won't be significant). As you point out, you don't pay tax on the growth, but you do pay income tax when you take it out. At 20% (if withdrawn over a number of years - staying in basic rate tax band) you would expect £20k tax due which would give you £80k - same as with an ISA, because it's the same percentage. But actually, we get 25% tax free, up to a cap (which the OP probably won't reach). So with that, you get £25k tax free, and pay 20% on the other £75k. So you only pay £15k tax, and you get £85k

(Plus the extra money her employer put into the pension scheme over the 10 years, now that she has opted in. Maybe £5k extra for that, at £15k/year salary.)

Now, it's a bit more complicated because it all depends on when you take it out of your pension, because of different tax bands.

If OP wanted to take it all out in one go to pay for something big whilst she was still working, she'd still get the £20k tax free lump sum from her pension, but she'd pay income tax on the remaining £80k + her £15k salary. That would take her well into 40% tax, and the extra £25k tax she would have to pay (yay for progressive taxation!) is more than her £20k tax free lump sum. She would only get £75k

On the other hand, if she stops working at 62, then not only does she get the £20k lump sum, but by drawing down the £80k over 5 years (and putting it back into an ISA at that point if she doesn't need it immediately), her income each year is £16k so tax is only £700 because of her personal allowance. In total, she would pay only £3500 tax, and would get £96.5k

The important thing is to think about your expected cash flows, and your different tax rates and allowances at different times of your life. Try out different options and see how it works out!

Came on to say exactly this. S&S isa all the way, I only started a few years ago and kicking myself. £20k this tax year and £20k for next tax year