How would you split inheritance lump sum between mortgage, renovations and long-term savings?

[justintumble]

I (sadly) have 175k inheritance. Really don't want to waste it, this will be the only time in my life I will have this sort of money.

Our mortgage is 150k, with no other debts. Our house is old and needs about 50k work to future proof it, we plan to stay for next 10 years + We are late forties with one young adult DC. Household income of 100k.

How much would you allocate to mortgage and savings, pensions etc. We can overpay mortgage by 10% a year.

Does the Financial Flow chart help at all ? I can’t do links but it is easily found if you search. You need to know what your long term plans are, and there is some thing to be said for putting it is an ISA and Premium bonds to avoid tax and the rest in the best account you can find, for a few months while you think.
I am sorry for your loss

Thank you I will have a look at that.

For me it would be renovations now to future proof the house and increase the value. Money into ISAs for instant access, some to pensions because that will be locked away until you are at least 57 if you are late 40s.

Mortgage wise we lump sum overpay at the start of the mortgage year. Also it is 10% of the original mortgage we took out with them so even though we have gone onto other products (fixed rates) it is 10% of the original amount from a decade ago not what we owe now. We are with Nationwide. It sits in savings until we pull it down to overpay.

I would be looking to get the mortgage gone so that you can use your monthly mortgage payment to pay into ISAs or pension. I found James Shack on Youtube a brilliant advisor on pensions and ISAs, and this video in particular was interesting regarding where to put your money.

Can you say what you have at the moment in savings, pensions, other investments?

How is your pension currently? I think this would get tax relief on it if paid into a pension and then can withdraw 25% tax free at 57. This may be more efficient than paying off the mortgage now, although psychologically that would be a lovely feeling!

Remember you’ll get taxed on the interest as long as it’s sitting in a current account (which will then also mess up your next years tax code as I have found out recently) so move it into ISAs and premium bonds asap whilst you’re working out what to do. Sorry for your loss x

£60k into a pension which if either of you is a higher rate taxpayer, would only cost ~£40k of the inheritance. Possibly do that two years in a row (or for both of you) to turbocharge your future pension.

£50k renovation
£10-15k for a special holiday
The rest into savings in stocks and shares ISAs (£20k annual allowance each). When you can remortgage use some of the ISA to reduce the mortgage.

I'm sorry for your loss.

Are you financially planning with your DH? If so, what I would do is put your £50k aside in two high interest savings accounts (£25k in each of your names) to minimise the tax you'll pay on the interest of that until you spend it on the house.

I would pay off 10% or your mortgage

So that leaves you with £110k to allocate.

Do you have an emergency fund? I'd prioritise that next. Get around 15 to 20k set aside in that

Are you both higher rate tax payers or just one of you? I would prioritise your pensions next (the higher earner's priorised above the lower earner's) either by salary sacrifice or by opening a SIPP. Use up the 40% tax relief. That's a fantastic way to generate wealth since you effectively put away £10k for every £6k you add to your pension. Then if you have opened a separate SIPP, you could take this pension with its tax free lump sum earlier than you properly retire in order to fund work part time, travel, give your DC money towards a house deposit etc. I would be inclined to put 40k to 60k split between the two of you towards that.

Then I would use any ISA allowance you have this year in a s+s ISA invested in a low fee global tracker. So that's upto £40k between the both of you.

I personally wouldn't want to clear my mortgage yet. Paying off 10% is a good enough chunk, but the interest you'll pay on your mortgage is less than the growth you can make through your pensions and s+s ISAs. If you still have a mortgage when you retire you can pay it off with your tax free lump sums. And keeping some money invested in the s+s Isa and emergency fund will give you flexibility you wouldn't have if it was all tied up in the house.

I have a SIPP, DH higher rate taxpayer with DC pension. To be honest we have been lax with pensions in younger years so I am concerned about our retirement.

We have an emergency fund to cover 3 months expenses. Also a modest amount in ISAs. We haven't had the best of luck with health issues etc over the years so are not in as comfortable a position as we'd like. We have planned to move to a smaller house and / or out of the area if we need to when we are older, so that we can free up some extra money this way.

Thank you for all the advice, it is a lot to think about.

We had £150k and put £60k into mortgage, £40k into investments and the rest is earmarked for a big holiday and house and garden upgrades.

We already had good savings and pensions.

@FusionChefGeoff that's a great position to be in !

Pension first, 10% off mortgage, renovations next as labour and materials are increasing so fast and then stocks and shares isas then with anything left hold in savings until next tax year and then pensions again and more isas.

Given that a) you are behind with your pension and b) your house needs work, I’d start there. £50k renovations and £40k each into pensions. Then £20k each into a S&S ISA. That leaves £5k contingency on the renovations or to add to cash savings.

Your mortgage isn’t especially high and paying it off early is unlikely to be the best idea financially in the long term. (That said, some people really value the security of having it paid off and this may make them happier than the additional money, in which case that’s the right decision for them,)

I would overpay the mortgage by 10% each year, do the renovations and invest in stocks and shares ISAs or your pensions. With that much you can do it all. Keep some back to overpay by 10% the mortgage and when your deal expires consider paying more off. I know lots advise investing rather than paying off the mortgage but I think it is still worth doing depending on your interest rate.

if I was in this position. I’d spend £50k on renovations. 100k to clear down the mortgage (if that’s an option). The monthly saving on mortgage payments could be added to pension, and taken off at source to be tax efficient. Spend the rest on holidays/treats. Downsize in 10 years to free up money for retirement.

The modest amount in ISAs is part of your emergency fund but it would be better to have 6 months expenses available in that.

Will investing in the house actually increase it's value by the same amount, it doesnt always. I'm a big fan of energy saving investments as they will save you money. You could consider moving as an alternative to doing up this house.

If you havent used your ISA allowance for this year then fill it now while you consider your options. Ybs has a flexible ISA with a reasonable interest rate - not the best but you could remove money and put it back later.

When did you last remortgage/ what is your loan as a % of valuation? If you currently have a low interest rate mortgage the answer is different to if you are paying a high rate, especially if paying off a chuck would mean you'd get a lower interest rate in future.

Ask yourself the questions but I'd suggest it will probably be sensible to do the renovations if they do add value, fill ISAs, take a chunk of the mortgage and use the savings to increase your pension.

Personally I would pay for the £50k building work first
You'll then have £125000 left
I would chuck another £20k each into an ISA each assuming you haven't used your full allowance this year as I assume you are probably self employed if you are paying into a SIPP rather than a works pension. I think i would want more than 3 months of emergency fund available if you couldn't live off one income, also you could use some of this money to pay off the mortgage later if needed. Down to £85k remaining
Then I would put the £15k you can overpay against the mortgage this year (assuming it's 4% or more interest rate). You're then down to £70k. I would check when the annual overpayment of the mortgage can happen again or when your fixed rate is coming to an end, but I would hold back another £15k for the next one. You'd then have £55k left
I would then look at what your pension situation is and probably chuck it at the pension pots

This would theoretically mean you have £40k in ISAs on top of whatever else you have in their and your 3 month emergency fund, which together should cover most things that could go wrong financially for a good while
Your mortgage would be down to £120k by the second year over payment which with your combined income should be fairly quick to clear and allow you to start paying more into pensions and ISAs for retirement
Your pensions would be boosted by £55k + tax and have 20years to grow

We sadly are also in this position. We already had savings and are saving money with our current income and outgoings.

We are holding off paying off our mortgage as it comes up for renewal next year so we will likely clear a significant lump off that then. It gives us some breathing room for working out what best to do with the money.

I'm currently a stay at home parent so whilst the money is in my name we aren't paying tax on the interest so we have time.
We already had a budget where we are saving a decent amount and enough savings to cover most eventualities.
We did our major renovations a couple of years ago and replaced my partners car last year. Potential large expenses over the next 2-3 years are replacing my car as it's from 2011 and starting to get niggles, solar panels, a new bathroom and build an ensuite. We will be keeping some money in cash to cover some of this as well as investing in shares for longer term gains.

The bulk of the money will be going off the mortgage as our pension situation is ok.

I would look at costs for the next 2-3 years, a lump sum off your mortgage and up your pension contributions. Our thoughts are that we can control most of our expenditure and lifestyle but we can't control mortgage payments and interest rates. We will use the difference in the current and reduced mortgage monthly payments to increase our monthly pension contributions