Many of us dream of having hundreds of thousands of pounds in cash, but in reality, deciding what to do with such a large sum can quickly turn into a nightmare. Interest rates are at their lowest, annual Isa contributions are capped at £ 20,000 and pension tax breaks could be limited by the government.
Gene Wilcox, 64, from London, faces such a situation. She is set to sell her house in the capital for £ 875,000, downsize and move to Hove in East Sussex to be closer to her children. She is currently renting a property in the area for £ 1,200 per month.
The plan is to buy a house for around £ 500,000, leaving him a considerable amount of money. However, the complications do not end there. Next year, Ms Wilcox is planning to retire and is unsure how to fund it.
Currently, she earns £ 2,800 per month. She rents a room at her London property for £ 1,000 a month and has a rental contract worth £ 350,000, which earns her £ 1,300 a month.
Ms Wilcox also gives yoga classes for £ 500 a month at a studio she partly owns, which is worth £ 100,000. Selling her house and studio means her monthly income drops to £ 1,300, but she won’t have to pay £ 1,200 in rent. When his state pension starts at age 66, his income will increase to £ 2,050 per month.
There will be no mortgage or rent, but Ms Wilcox still needs more income: she has a car payment plan that costs £ 650 a month and has an outstanding balance of £ 14,000.
Fortunately, there are enough assets to generate income: some £ 400,000 in estate sales, a pension of £ 40,000 and a little Isa. Mrs Wilcox already withdraws £ 5,000 a year from the pension.
She asked, “Do I use the money to buy another property to rent or put the money in a savings or investment account? Ownership has worked for me in the past and I understand that, but I don’t want my income to be tied too much to just one market.
Another concern, said Wilcox, is inheritance tax. His estate is important and is not in a position to avoid the dreaded death tax.
She added: “I’m also concerned about the Financial Services Compensation Scheme’s £ 85,000 protected savings limit, so do I have to split my money between multiple accounts when I’m about to buy the Hove property?
“Also, is there a way for me to use my pension and Isa to invest the money to minimize capital gains tax?” I would be a conservative investor, but I wouldn’t mind risking around £ 50,000. “
Felix Milton, Certified Financial Planner at Philip J Milton & Company, said:
Assuming Ms Wilcox is able to buy property in Hove within six months of selling her home in London, she doesn’t have to worry about going over the £ 85,000 FSCS cap, as she would be entitled to the program’s “high temporary balance” protection. This covers up to £ 1million for six months.
If she expects to keep the money longer, she should put £ 85,000 in a number of easily accessible savings accounts. The best rate at the moment is 0.5 pc from Tesco Bank and Marcus. After buying her house in Hove and selling the property and the London yoga studio, she will have around £ 400,000 in cash.
The first thing to do is to pay off any debt, like the £ 14,000 car loan, which will save any future interest accrued and reduce your expenses by £ 650 per month.