How best to use 150k inheritance with mortgage and poor pension provision

[macchupicchu]

We have been left 150k by a dear elderly Aunt.

Situation is : Both 50, mortgage of 165k on house worth £575k, and about to remortgage. Household income £80k and unlikely to increase. Poor pension provision and other savings. Loan of 9k. House needs 20k urgent work, 10k other work (not urgent). Garden room used as a business needs replacing as rotting away.

My thoughts are:

Pay off 9k loan
Pay 65k off mortgage
Spend 20k on urgent work
Spend 20k on garden room
25k into emergency fund
10k holiday / fun

With the 500 pcm freed up from lower mortgage payments and no loan repayments, add to pensions, savings, overpay mortgage, save towards non urgent work on house or any combo of above.

Further thoughts are:

-We could do with an additional car

-Would money be better spent on pensions rather than overpaying mortgage (there is something very appealing about a mortgage of less than 100k at our age though)

-Should we just cut our losses and downsize and clear mortgage that way (was our plan to do that age 60)

I think that is everything, am tying myself in knots trying to make the best use of this money.

Any advice please? Thank you!

Half to pensions, half to the house/debt repayments. No room for holidays or treats in your financial position.

@ijustwanttoworkout fair enough, so you mean £75k into pensions and then £75k on renovations (40k) and mortgage (35k)? No emergency fund at all?

I wouldn't be spending 20k on a garden room.. You could build a summerhouse in the garden for £3k .

@Lastofthesummerwines fair point

Move house/downsize?

Two words for you.

Compound interest.

The first thing you pay off is the loan. It's likely to have the most unfavorable interest.

Second you prioritise the mortgage / pension. In the long run this will save you interest repayments on the mortgage and have a compound interest effect on your pension.

If you pay off the mortgage your monthly household disposable income will increase and you will be able to save for that holiday quickly.

If you go for the holiday/building work as a priority (unless the building work can't be delayed) they will cost more because of the effects of compound interest.

Even putting money for an emergency fund possibly isn't worth it because you will quickly recoup the money and if necessary in those circumstances you would be able to get a loan or downside etc if the situation required because of your assets.

I recently got £120k (life insurance) I paid off most of mortgage (£600k house), had some work done to house (new bathrooms/woodburner etc) and it’s gone. Didn’t treat ourselves but our monthly repayments on mortgage are now only £240/m so we can now save for the luxuries like cars and holidays etc

@JohnofWessex yes that is an option which we were planning to do in 10 years time, but could just do now instead. We love our house and have done lots to it over the years but now that it needs so much work (windows, damp proofing) it is tempting to leave it all behind.

What do you mean by poor pension provisions? Will you both get full state pension and do either or both of you have a private pension?

Assuming you mean full state pension but private pension pots are relatively small I think your plan sounds good. If you aren't getting the full state pension I would look at buying extra years first and if you don't have private pensions at all then my answer might be different.

No.

Don’t pay for upgrades you can’t afford. If you can spend £40k on the renovations, half into an emergency fund and half into your pensions. So £95k total to pensions, £20k to an emergency fund and £35k to your mortgage, if you must.

@UnbeatenMum we will both get the full state pension, but will have small private pensions to top up. We are not fancy though, and can live frugally (fairly) happily. I am panicking about still having a mortgage when we're old. We can use lump sums when 57 to clear some mortgage perhaps, but the lump sums aren't going to be substantial.

@RedToothBrush thank you. Yes, compound interest, the 8th wonder of the world. If only I'd understood the magic of it before around age 45. Oh well am passing on wisdom to DC.

So - the 20k of urgent work really cannot be delayed as the house is damp and leaking. If we are to stay then this has to be done. So that leaves £130k. Then 9k loan gone, freeing up £300 pcm. Down to £121k. Split that 50/50 - pensions and mortgage? Then use spare monthly money as we choose.

You seem desperate to spend it all

I’m sorry for your loss.

Personally I’d do most of what you suggested but the £20k for a garden room I’d instead chuck into your pension funds and I’d put the £10k fun money aside as a starting point for the garden room/non-urgent works. I’d then salary sacrifice half of the cost reduction from the loan/lower mortgage into pensions and save most of the other half for the non-urgent work/garden room.

Only reason I’d spend £20k on the garden room right now was if either you could then easily recoup the cost if it then allowed your business to expand or if you store expensive stock/equipment in it and the poor condition means that the stock/equipment is at high risk of being destroyed.

Then in 6-9 months time once the dust has settled have a further review of your finances and the property market to see if downsizing makes financial sense for you - don’t do the non-urgent work/garden room unless you are sure you are staying put.

^ that's what I would do in your situation.
Garden room can wait. As can frivolous spends like cars etc.
Get that mortgage paid down and pensions funded (remembering the tax break on the way in is adding to your funds).
Then manage month to month spends better, enabling future 'fun' spends when you can afford it and safe in the knowledge you have secured future.

Fuck that Shit! Go on holiday and work out how to invest the rest while on a sun lounger... Jeeeesus - got to live life.

Depends on if you are about to remortgage and not paying off the mortgage in full. You want to look at the LTV thresholds on how much you have left. If you are above a certain threshold you'll get a better interest rate if you put slightly more into the mortgage. For the sake of the better interest rate it would be worth doing that. It would then give you more money in the long run to put into the pension.

It may be that your mortgage isn't close to one of these LTV boundaries so the thought is irrelevant but given that's where you currently are, thats what is do.

If also be mindful of when I dumped the money into the mortgage. If you do it before you remortgage you might be over the max extra repayments so I would check whether you have a limit on that if your inheritance comes before you do. You may find you can put in a certain percentage immediately rather than hanging around another account and then put in the rest when you remortgage.

So I wouldn't say a hard and fast this much to pension/ this much to mortgage because there's a few considerations in there too.

What do you mean? I do feel desperate, yes. Want to do the right thing as this won't happen in my lifetime again. I am pissed off with myself for historical decisions that haven't served me well, now I am approaching older age.

YES! Haha! It's all getting a bit too serious.

I agree basically with your plan

1. absolute priority pay off 9K loan tomorrow
2. I would never not have an emergency fund as if car breaks heating breaks you do not want to have to borrow to replace or repair because all money is either in house or pension. depending on your job security 3-6 months living expenses 3 months if secure or in public sector or 6 months if private or more vulnerable as it is harder getting new jobs if made redundant etc over age 50 probably in a no notice cash ISA (25K) best rates are about 4%
3. pay for urgent house repairs even if you sell the urgent stuff needs to be done ( no need for new windows unless leaking if double glazing leaking can get new glass panel) (20K)
4. you now have 100k left
5. 10K for fun holidays is entirely reasonable
6. check your mortgage when is it due to be paid off, what would be monthly payment is you paid off 65K taking it to 100K over 10 years or even 7 years so paid off at 57/60 years old,
7. get pension estimates make sure you are now contributing max possible at work and getting max employer contribution
8. you now have 15K left could put into stocks and share ISA ( something like a FTSE100 tracker ( about 7% on average over last few dacades) or S&P500 tracker ( this is Amercian equivalent generally better closer to 10% on average returns but more volatile)
9. work out how much you have free now per month with lower mortgage payments and decide whether to increase pension or continue to save some for more house improvements or drip feed into ISA increase pension contributions, save so you can buy your next car without finance or set aside for legal costs etc when downsizing

discuss what sort of retirment you want if your house is paid off 2 people can live on 2 x state pension, however one person living on state pension is much harder as many costs like heating etc do not halve if only one of you

look at rebel finance school on youtube

Definitely the loan, urgent work and emergency fund (does it need to be this big?).

If you are on reddit go into the personal finance bit, and there are flowcharts of what to do with a lump sum.

You say you can live frugally but with an income of £80k between you, it’s going to be quite a drop if you have only small private pensions on top of state pensions.

With this in mind, it might be more prudent to pay more now into each of your private pension so that this boost has time to grow. Yes, pay off your 9k loan and get essential work done to the house, and while prioritising your future post-life work now doesn’t sound like that much fun, it will give you more potential fun later in life.

Pay off loan and put the rest in the mortgage. Payments drop to 10% of what they are now and loan repayments disappear. Use the 90% of your mortgage payment and the bit you used to pay for the 9k debt to fix house. Once that’s done (next year? I’m guessing you have the figures), you are in the house you like all fixed up and only have a 15k mortgage

Since you have private pensions and a property, and as you are both 50, I would get advice from an independent financial adviser as to your best options - there will probably be several, but they should be able to advise on the way to use this one-off gift to its best advantage. Be prepared to phone several firms, and keep phoning round until you speak to someone you feel comfortable with. It should be possible to get one-off advice rather than ongoing management - my partner has done this several times, and it’s made a huge difference to his situation. The hourly rate will seem high, but you may only need an hour or two of advice. I do recommend getting professional advice, particularly as you say that you made decisions in the past which didn’t serve you well.

(No, I’m not a financial adviser!)

Lots of good advice.

Two builds.
Discretionary spending
No to another car - more annual cost which you can ill afford despite the lovely lump sum.
£10k on a holiday is a REALLY nice holiday. I suspect you will regret it when you look at the rotting garden room on your return. By all means put it to one side but personally I'd try to get more than one holiday out of such a sum. Life is short and waiting to do nice things when you retire is sh*t.
Non Discretionary
Is the house valuation in its current state or with the work done? Is it the house that you will retire in? ie suitable for lower mobility or other issues. Will one/both of your pensions cover its current running costs like heating, council tax etc.? You MAY wish to consider whether this is the house to invest in and whether you will see that investment in a resale. Obviously the time to sell up may be in 15 years when you actually retire but you should keep one eye always on selling up I think and not spend money on things that won't have mass appeal.