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Mini windfall...


scolopax
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Recently I has a very pleasant surprise in my pay packet, on investigation with payroll I will recieve a top up to monthly salary as compensation for a change from a final salary pension scheme to a direct contribution scheme afew years ago. I will get this until I retire or change jobs, so potentially for another 20 years.

Now it is a nice sum, not huge, worth to me about £400 a month take home.

So the question is, what best to 'invest' it in ? Otherwise it will just get lost in general household expenditure

 

My first thought is a rental property, one can be purchased here for about £100K, with a rental income at about £500 a month

 

any better suggestions ?

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1 hour ago, scolopax said:

Recently I has a very pleasant surprise in my pay packet, on investigation with payroll I will recieve a top up to monthly salary as compensation for a change from a final salary pension scheme to a direct contribution scheme afew years ago. I will get this until I retire or change jobs, so potentially for another 20 years.

Now it is a nice sum, not huge, worth to me about £400 a month take home.

So the question is, what best to 'invest' it in ? Otherwise it will just get lost in general household expenditure

 

My first thought is a rental property, one can be purchased here for about £100K, with a rental income at about £500 a month

 

any better suggestions ?

I’d split between property and equity, both good long term plays if you can keep your hands off the cash in the interim, look at FTSE 20 year charts..

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48 minutes ago, Winston72 said:

you can have 2 personal mortgages if your happy to sail under the radar, another thought if it were me would be to pay my existing mortgage off quicker thus paying less interest,

I wouldn't pay of your existing. I would get a buy-to -let and with the >5% return, i would pay off the B2L and some of your mortgage.

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What do you earn a year? 

Due to recent changes on rental property income you could end up paying 40% tax on the rental income before your allowed to take out the expenses of the mortgage. 

Lots of landlords who previously made money will now lose money as they have to pay tax on the total rental income rather than the rental profit. 

Also with the additional stamp duty and cuts to what you can claim it’s taken a huge hit. 

Then if Labour get in again in the next few years it’s going to be 10x worse!

Id think VERY VERY carefully before looking at a rental property these days. 

Better off with a stocks and shares ISA, any increase can be tax free. 

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This amount is most likely how much less is going into your pension scheme.  To me, the most obvious thing is to put it back into a pension.   Tax relief on the way in and 25% tax free on the way out.  You will have lost a lot going from DB to DC.

The numbers for BTL may work in your area but you will be taxed on the income, there will be running costs, there will be maintenance costs, there will be vacant periods, there will be an upfront purchase tax, there will be capital gains tax on exit.

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You say the windfall is approx £400 / month for approx 20 years. In savings this equates to £96,000 (plus interest) available in 20 years time to try and bridge the gap between an end salary scheme and a defined benefits scheme during your retirement. You could look at a personal pension plan. Independent advice is available from Government sources like Pensionwise or The Pensions Advisory Service. Good Luck in what you do.

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Think very carefully about property rental, a family member has just had her property back after 9 months of trying to get the tenants out for failing to pay, its cost her a absolute fortune in solicitor/barristers & now she has got to repair all the damage as they have totally wrecked the house. 

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This must be fate - I have recently been contacted by a Mr Umgono who has found a fortune in unclaimed prize money in a Nigerian bank account - all he wants is a cash payment of £2k to release these funds to me - send me the £2k and I will split the £11million 50:50 with you when it hits my account - you cannot lose.

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Personally, if looking for long term savings, I would (and have myself) invest in ISA as much as you can afford, or to the permitted limits each year.  This can be done in a number of ways, stocks and shares, unit trusts, cash, and through a variety of 'reputable' providers (banks, brokers, pension providers etc.), but the annual total invested must be less that £20,000 (currently) in a tax year and there are a few rules.

ISA is a tax sheltered environment provided (not a loophole, but a deliberate policy) by the Chancellor to encourage long term savings.  You can invest regularly monthly, or lump sum annually, to a limit currently £20,000 per year.  It is also a long standing government encouraged product that is well understood and has stood the test of time.  You cannot 'withdraw and return' from an ISA without loosing the tax advantages as it is intended to be a long term savings vehicle.

Income from an ISA is tax free (i.e. dividends and interest), and ISA holdings are free of Capital Gains Tax.

There are also various tax advantages in 'self invested pensions schemes' (SIPS), but the rules here are quite complex, and you would need to take sound advice.  I believe these can be used to buy rental property (as a pension investment), but I'm not up to speed in this area, and good advice is essential.

Be aware that no one can predict what future governments may do to either encourage, or penalise those who save.  Prudent peoples savings are a shining target for left wing money grabbers.

 

Edited by JohnfromUK
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Some places will give you a mortgage to buy a woodland. It is a lot of fun. You can camp overnight. You can hunt if you make sure there are no covenants against this. There are no council tax on them. They go up in value all the time. Any wood products from it are tax exempt. You can sell it in the future hopefully for more than you paid for it. As you are in East Yorkshire you should be able to buy one within a reasonable travelling distance at a reasonable price.

We bought ours through these using some of a pension lump sum.

https://www.woods4sale.co.uk

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As others have said this is to compensate you for a reduction in pension you will get as you are moving from a Defined Benefit to Defined Contribution scheme. 

Therefore your primary concern should be to bridge that future gap and comsider putting the money into a Personal Pension. This has tax advantage at source so you will get 40% benefit if your are on a higher tax rate (so for every £600 you put in the government will put in £400 as part of a tax rebate) or 20% if lower rate. 

The drawback with this is that you have to wait until you are 55 to benefit from it and then you can take 25% tax free but the remaining 75% is subject to income tax depending on how much you take out per year and tax allowance etc. Future governments could also change the rules  

The other option is to put it into a Stocks & Shares ISA.  This is taxed at source (as you will be paying it out of taxed income) but free of tax when you cash it in. You can cash it in at any time and don’t need to wait until 55 but you should if you want to make up your future pension gap  

These are the sensible options. 

Alternatively splash out on whatever you want on the basis that life is too short. Many do and I wouldn’t criticise you for it. 

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3 minutes ago, AVB said:

As others have said this is to compensate you for a reduction in pension you will get as you are moving from a Defined Benefit to Defined Contribution scheme. 

Therefore your primary concern should be to bridge that future gap and comsider putting the money into a Personal Pension. This has tax advantage at source so you will get 40% benefit if your are on a higher tax rate (so for every £600 you put in the government will put in £400 as part of a tax rebate) or 20% if lower rate. 

The drawback with this is that you have to wait until you are 55 to benefit from it and then you can take 25% tax free but the remaining 75% is subject to income tax depending on how much you take out per year and tax allowance etc. Future governments could also change the rules  

The other option is to put it into a Stocks & Shares ISA.  This is taxed at source (as you will be paying it out of taxed income) but free of tax when you cash it in. You can cash it in at any time and don’t need to wait until 55 but you should if you want to make up your future pension gap  

These are the sensible options. 

Alternatively splash out on whatever you want on the basis that life is too short. Many do and I wouldn’t criticise you for it. 

hello, good post AVB?

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On 05/06/2018 at 17:06, Bobba said:

You say the windfall is approx £400 / month for approx 20 years. In savings this equates to £96,000 (plus interest) available in 20 years time to try and bridge the gap between an end salary scheme and a defined benefits scheme during your retirement. You could look at a personal pension plan. Independent advice is available from Government sources like Pensionwise or The Pensions Advisory Service. Good Luck in what you do.

You mention interest but the important consideration over 20 years is compound growth I.e the extra money you earn in growth in the first year also grows in year 2 etc. It compounds. 

So £1000 at 5% growth is

£1050 at the end of year 1

£2102 at the end of year 2 (not £2,100)

this makes a big difference

so £400 per month over 20 years at 5% growth (not unrealistic) gives £164,000 compared to your £96,000 contribution.

you do however need to understand that inflation will erode the value of that £164,000  it obviously won’t buy what £164,000 will buy today!

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I think there is a good case for spreading your 'savings' between pensions (tax relief on the way in) and ISA (tax relief on the way out).  If you are a higher rate tax payer, then pension is attractive, but do remember that there is an upper limit to the fund above which tax relief is no longer available.  It is quite high and so won't catch most people, but has been coming down in recent budgets, and can catch people with significant historical pension funds accrued.  Worth checking.  Pensions also have traditionally had rules on how (and when) you could use the money, and how much you can get as a tax free withdrawal.  Note that these are altered by successive Governments so often that long term planning is at best 'hit and miss'.

ISA gives greater flexibility of access to your money, and you can move money (within an ISA and usually with no charges) from products chosen for long term growth to ones designed to maximise income when you choose to retire - no age restrictions.  All income is tax free and if you are already likely to pay income tax on your pension (state plus any employers/private pensions), having the income tax free from ISA may be attractive.

During my working life I spread my savings between ISA and pensions.  Now I have retired (a little early at 60), I am living on tax free ISA income, and still have my (state and private) pensions to start in 4/5 years time when I'm 65 for private and 66 for state.  At that time I may well become a taxpayer again, so having the ISA income tax free will be a bonus.

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1 minute ago, JohnfromUK said:

I think there is a good case for spreading your 'savings' between pensions (tax relief on the way in) and ISA (tax relief on the way out).  If you are a higher rate tax payer, then pension is attractive, but do remember that there is an upper limit to the fund above which tax relief is no longer available.  It is quite high and so won't catch most people, but has been coming down in recent budgets, and can catch people with significant historical pension funds accrued.  Worth checking.  Pensions also have traditionally had rules on how (and when) you could use the money, and how much you can get as a tax free withdrawal.  Note that these are altered by successive Governments so often that long term planning is at best 'hit and miss'.

ISA gives greater flexibility of access to your money, and you can move money (within an ISA and usually with no charges) from products chosen for long term growth to ones designed to maximise income when you choose to retire - no age restrictions.  All income is tax free and if you are already likely to pay income tax on your pension (state plus any employers/private pensions), having the income tax free from ISA may be attractive.

During my working life I spread my savings between ISA and pensions.  Now I have retired (a little early at 60), I am living on tax free ISA income, and still have my (state and private) pensions to start in 4/5 years time when I'm 65 for private and 66 for state.  At that time I may well become a taxpayer again, so having the ISA income tax free will be a bonus.

I think you are missing a trick. Why are you not drawing down your private pension? At the moment you appear to be losing out on your £10k annual tax allowance. I would take the 25% tax free lump sum now along with £10k pa tax free first rather than drawing down your isa. 

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3 minutes ago, AVB said:

I think you are missing a trick. Why are you not drawing down your private pension? At the moment you appear to be losing out on your £10k annual tax allowance. I would take the 25% tax free lump sum now along with £10k pa tax free first rather than drawing down your isa. 

In fact, I don't think I am because the situation (in my case) is a little more complex than I set out. 

My non ISA income (some rental income and share/unit trust dividends from outside ISA) take me near my personal allowance.  It is true I don't quite fully use it, but I do use most of it.  I'm also only drawing 'income' from ISA (i.e. dividends), not drawing down capital, and am still able to add the annual allowance to my ISA by moving funds from shares/unit trusts held outside ISA into ISA to the allowed limit each tax year, so I am still increasing my ISA (and the tax free income) as much as allowed. 

Most of my private pensions (I have 3) are in 'frozen' defined benefit schemes from legacy employments 30 and 40 years ago with a cut in when I reach 65, and the providers penalise quite heavily for 'switching them on early', and only give poor transfer values, so these are best left alone (advice I have received from separate independent sources). 

I do have a 'pot' from defined contributions made later in my working life that I could 'switch on' as income, or draw down 25% capital, but at present I have not needed to.  If I was unable to take up my annual ISA allowance I might do that to move into tax free income, but at present that has not been necessary as I have sufficient to use up my ISA allowance without raiding the pension pot.

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