Yahoo Finance Ask a Money expert: 'I've inherited money that doesn't fit inside an Isa, where should I put it?'
I recently received a £200,000 inheritance, and am considering investing it for the long term or putting it into my pension, but can’t do so all at once due to the annual allowance limits. What should I do with it? I’m 42, and still have a long time until retirement.
PT, via email
Handling inheritance money can be difficult. For some, it will be the largest individual amount of money they have ever had to manage, and the tax implications to mismanaging it can be severe.
Here is how to handle such an inheritance in three different scenarios, if you don’t plan to use the money immediately.
Investing the money as a long-term savings pot
What you actually invest in depends on your risk tolerance, level of knowledge, and time horizon for needing the money back. Taking financial advice may be sensible. Read our guide to picking a financial adviser here, guide to fund types here and our top tips for investing here.
In terms of where to put the money, a combination of accounts will need to be used.
Philippa Gee, of Philippa Gee Wealth Management, said: “I would suggest three accounts be set up, but they can all be invested in the same way to avoid complication.”
She said that a stocks and shares Isa, self invested pension (Sipp) and a regular investment account should be set up. Read our guide to the best Isa providers here, and cheapest Sipps here.
The Isa allowance of £20,000 per year should be fully used, as should the pension allowance, which will vary depending on individual circumstances and what pension contributions are already being made.
Each individual can contribute up to £40,000 a year to a pension, including tax relief and employer contributions. However, personal contributions can’t be higher than annual earnings.
For every £2 earned over £150,000, the annual allowance is also reduced by £1, down to a lower limit of £10,000.
The rest can go into the investment account, which is subject to capital gains and dividend tax. Ms Gee explained that over time, the money from the investment account can be moved into the Isa and Sipp accounts.
“It is about creating maximum wealth over time, combining the initial tax relief and inheritance tax advantages of pensions, with the long term tax efficiency of an Isa,” she said.
“If there are two of you, the money could be used to fund an Isa and Sipp for them too, which would speed up the move to tax efficiency."
Putting the money into a pension
If you want to put the entire inheritance into a pension, this will take more time, due to the limitations on how much you can add each year.
Ms Gee said: “Bear in mind that while this strategy will benefit from upfront tax relief, you are creating more taxable income in retirement compared to putting some of the money into an Isa.
“If you are married or with a long-term partner, look at what pension provision you both have. It is so often the case that one person has established considerable provision in their name, and not arranged any for their partner or spouse.”
She explained that in couples where one member receives most of the income in retirement, there is a danger of them falling into the higher tax bracket unnecessarily. Instead, pension provisions should be split more evenly, to ideally keep both individuals as basic rate taxpayers when pension income is taken.
If the money is needed within five years
If you need the money within five years, you shouldn’t invest it, as the risk of being forced to sell at a loss is too great.
“If you have other money, for the long-term, that you would invest into Isas, then you would not want to use the inheritance money for that purpose,” said Ms Gee.
However, she said that if you are not using your full allowance, it is “sensible” to make use of Isa allowances even if the money is needed within five years.
The top easily accessible cash Isa is from Coventry Building Society. It pays 1.35pc interest, and can be accessed with 30 days’ notice.
The best non-Isa easy access account is from Shawbrook Bank, and pays 1.25pc interest.
These rates are below inflation, but are better than nothing.
Keep the amount held with any one bank to £85,000 or less, which is the Financial Services Compensation Scheme limit, per person, per provider.
savingschampion.co.uk provides a comprehensive selection of the top savings accounts.
