‘I'm 49, and just inherited £500k – but have no idea how to invest it'
Hi Kyle,
I'm at a bit of a crossroads and seeking the best way of investing and retiring comfortably as soon as possible.
I'm 49 and live with my partner (we've been together for 20 years) and two children aged 16 and 14. I've just inherited £500,000 from my dad's estate, as well as £400,000 in share investments and a house in Dorset, which I see myself moving into eventually.
I don't have much of a pension and currently work in a part-time job earning approximately £20,000 a year. I own my house with my partner outright, and a buy-to-let property which I bought for £320,000 (now worth £420,000). I also have an Isa.
My partner works full-time and already has a good pension. When would be a good age to retire? What should I do to ensure my children are also provided for?
I could put some of the money from my dad's will into their names, but I don't know how much or whether this is a good idea. Also, I'm unsure where or how to invest the £500,000. I have so many questions and I need a good starting point!
Thanks,
– Amanda
Dear Amanda,
I can appreciate you reaching out for help as there's an awful lot for you to think about here.
With a cash windfall – such as an inheritance – there is no one-size-fits-all answer in terms of what do with the money. I'm going to suggest some general considerations, but you may benefit from seeking out a financial adviser or planner who can come up with a concrete plan for your personal circumstances.
I'd also recommend considering the PLSA's Retirement Living Standards, which suggest guideline annual incomes for those seeking a minimum, moderate or comfortable retirement.
Firstly, before you review my ideas, make a will or update an existing one.
Plan your pension
If you want to retire as soon as possible, there are some things to consider. The first is your state pension, which you'll be able to claim at age 67 under current rules. The full state pension is currently worth just over £11,500 a year, so whether you plan to pack up work before this point or not, it's worth having.
I'd urge you to get a state pension forecast to find out if you're on track and identify whether there are any gaps you could fill to receive the full entitlement. You can plug these gaps by making voluntary National Insurance contributions.
The next thing to be aware of is that the earliest you'll be able to draw from your personal pension savings is age 57. This is important, because one of the most tax-efficient things you can do with the £500,000 you have inherited is to put as much of it as you can into a pension.
By doing so, the contribution will be boosted by tax relief, equivalent to the rate of income tax you pay. Each tax year, you can invest 100pc of your earnings up to a maximum of £60,000, whichever is lower. There's nothing to stop you paying in more than that in a year, but there's a charge on any excess which effectively wipes out the upfront tax advantages.
Given that you earn £20,000 a year, your income limit is £16,000 into a pension, as you will receive £4,000 in tax relief. However, given the end of the 2024-25 tax year is approaching, there's the opportunity to tuck away up to £32,000 of the windfall by using allowances for both the current tax year and the next, which starts on April 6 2025.
Exploit the Isa allowances
As well as pensions, Isas are a tax-efficient place for your money to grow. Isas are much more flexible than pensions, as you can make ad-hoc withdrawals whenever you see fit.
With Isas, everyone has a £20,000 annual allowance. With the end of the tax year approaching, you could put £40,000 into an Isa for both the current tax year and the next one.
You did not say whether you and your partner manage your finances together or keep them separate. Just to flag that more of the windfall can be shielded tax efficiently if you join forces.
In terms of helping your children financially, you have a few options. The first is to open junior Isas, which can provide them with a nest egg that they will be able to access from age 18. The annual allowance is £9,000 until they reach 18 and, like an adult Isa, the money grows tax-free. Just make sure you're happy for them to have control of the money at this point.
Investing ideas
In terms of investment options, it depends on what age you expect them to need the money. Your eldest would inherit the funds in two years' time, and the stock market requires time frames of at least five years, due to the potential volatility, so plumping for cash savings might be the most sensible option.
That said, if the plan is for your child to use the money later in life, investing might make sense.
Another option is to make pension contributions on their behalf. You can pay up to £2,880 a year – boosted to £3,600 with tax relief – into a pension for each child. However, bear in mind that they won't be able to access these funds until retirement, and given the wave of financial challenges younger people face these days, you might prefer for them to enjoy it sooner.
Putting some of the windfall into cash accounts will give you some peace of mind. However, be mindful of exceeding the personal savings allowance. A basic-rate taxpayer can have just under £20,000 in a savings account earning 5pc before having to pay tax on the interest.
Building your own portfolio takes time and effort, which can be a bit daunting. For those who would prefer a more hands-off approach, there are short-cut options in the form of multi-asset funds. This type of fund makes the investment decisions on your behalf, splitting your money across a mix of different assets, but mainly shares and bonds.
Such funds are seen as an ideal starting point for those who want a hassle-free option due to the diversification on offer.
Our analysts have chosen six quick-start funds that they believe stand out from the crowd. Three invest passively – meaning they offer index-like returns (minus fees) – so the investments rise and fall in line with how stock and bond markets perform. The three funds are: Vanguard LifeStrategy 20pc Equity, Vanguard LifeStrategy 60pc Equity and Vanguard LifeStrategy 80pc Equity.
The other three funds are actively managed, meaning a stock picker selects a range of investments in an attempt to beat the wider market, although there is no guarantee they will achieve this.
The three funds are: Royal London Sustainable Managed Growth, Royal London Sustainable Diversified and Royal London Sustainable World. The Royal London range has a focus on sustainable investing and seeks to invest in companies delivering some positive societal or environmental benefit through their products or services.
The six funds invest differently, adopting a conservative, medium-risk or adventurous approach.
Funds that are more conservatively invested have lower exposure to shares, while those that are adventurously positioned have most or all the portfolio in shares.
Kyle Caldwell is funds and investment education editor at Interactive Investor. His columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.
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