The Investment Doctor helps a reader decide where best to put a £10,000 inheritance.
"I have an inheritance of £10,000 to invest, but I have no pension. I desperately need some suggestions as to where, and how, to invest in a pension. I am a 35-year-old mother of two. My husband does have a workplace pension – he works for one of the big building societies – but is hoping to become self-employed in a year or two.
"Our old age seems precarious, at best. My annual income has not been higher than £10,000 since I had my first child, seven years ago.
"Given that I have not been earning enough to pay tax, do I qualify for three years’ tax allowance and, if so, how do I claim it?
"It would be a relief if you would help by offering me some advice."
Making provision for retirement is important but must be in the context of your overall financial planning.
Martin Bamford, chartered financial planner at Informed Choice, says: “Before saving for the future, you should consider repaying any short-term, unsecured debt and ensure you have a healthy emergency fund of cash savings.”
This is particularly important given your husband is about to go self-employed, as it will help you cope with periods of variable household income.
If you’re investing for at least 10 years, consider investment funds that buy shares as your money will be spread across dozens of companies, according to Tom McPhail, head of retirement policy at Hargreaves Lansdown.
“Your investment will go up and down in value, but over the long term it is reasonable to expect you’ll get back significantly more than if you just stick the money in the bank,” he says.
One option is a Stocks and Shares individual savings account (Isa), where any investment growth will be tax free and where you can get at your money at any time. You can save up to £20,000 this tax year in a Stocks and Shares Isa.
Mr Bamford suggests you also consider a Lifetime Isa (Lisa), a new type of Isa which was introduced by the government in April for those under 40 years old. You can save up to £4,000 in each tax year – but you’ll also receive a government bonus of 25%, which equates to an extra £1,000 if the full amount is committed.
Note that you can’t pay into your Lisa once you reach 50, and if you withdraw the money before you turn 60 (unless you’re using it to buy your first home or you’re terminally ill) you’ll be charged 25%.
“You could invest your inheritance over a period of years, which also helps to drip-feed the money into investment markets, reducing any timing risk,” he adds.
The other option is to invest in a pension with each individual being allowed to pay in up to £40,000 every year, according to Gary Smith, a financial planner at Tilney. “You are also able to carry forward any unused annual allowances from the previous three tax-years,” he adds. However, the amount you will be able to contribute is restricted to the lower of your available £40,000 annual allowance or your earnings.
“If we assume that your earnings are £10,000 during the current tax-year, the maximum you could contribute personally would be the lower figure of £10,000,” he says.
However, Mr Smith also points out that your contribution would be topped up in tax relief.
“If we assume that you were able to contribute £10,000 into a pension during the current tax-year, then you would only actually need to contribute £8,000 of your inheritance, as £2,000 in tax relief would be obtained for you by your pension provider,” he adds.
You could then contribute the remaining £2,000 to a pension next year or use it to fund an Isa instead.
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Another option would be to pay money into your husband’s pension, according to Mr McPhail.
“This might make sense if he is eligible for higher rate tax relief but it probably makes more sense to invest in your own name,” he says.
Alternatively, spread the £10,000 across a pension, a Lisa, and the balance in a stocks and shares Isa, using the first two to invest in long term funds and keeping some money in the Isa in cash.
“You get the pension and Lisa allowances every year so if you want to invest all your money for the long term and get the most out of the government top-ups you could always stagger your investment across two tax years,” Mr McPhail adds.
Rob Griffin writes for The Independent, Sunday Telegraph and Daily Express