Q I am 50 years old and have just inherited £35,000. This is likely to be the last money I inherit, so I want to be careful about what I do with it. We still have a lot to pay on the mortgage, but apart from that we are debt-free. I have several pensions from previous and current jobs but sadly none have much in them.
Would it be best to put the money I have inherited on the mortgage or should it go into my current pension (and will this save on tax)? Or should I put it in Isas and hope for the market to improve by the time I retire, which won’t be any time soon?
A One of the advantages of putting the money into your pension is that – within limits – you get a government top-up in the form of tax relief on your contributions. What this means is that if you are a basic-rate taxpayer (or pay tax at a rate of 19% in Scotland), it costs only £80 to add £100 to your pension pot, because the government pays in £20 for you. If you are a higher- or additional-rate taxpayer, tax relief means £100 of pension savings costs £60 and £55 respectively.
However, the most you can get tax relief on is 100% of your earnings or £40,000, if this is lower. If you earn £150,000 or more, the £40,000 limit gradually decreases depending on how much more than £150,000 you earn. If you have no earnings, the most you can pay into a pension is £2,880 each tax year. The disadvantage of putting money into your pension is that you won’t be able to get at it until you are 55 at the earliest.
This is earlier than you can get at your cash with a Lifetime Isa where, unless you are buying a home, you can’t access your cash until you are 60. However, because you are 50, saving in a Lifetime Isa isn’t an option. But you can choose to save in a standard cash or stocks and shares Isa, but only up to a maximum of £20,000 in each tax year. There is no tax relief on payments made into an Isa, but income and gains are tax-free and there is no age limit on when you can get at your money (apart from with a Lifetime Isa).
There’s no limit on how much of your mortgage you can pay off, but you need to watch out for early repayment charges if you’re on a special deal and want to pay off more than a certain percentage of the loan. The bonus of reducing your mortgage is lower monthly mortgage repayments. If you wanted to get your cash back at a later date, you would have the option of increasing your mortgage back to its original level.
Given the limits on what you can save in pensions and Isas – and the possible limit on how much you can pay off a mortgage without paying a fee – putting the whole £35,000 into any one of those things isn’t likely to be an option. Instead, spreading the cash over pension, ISA and mortgage would be a flexible compromise that doesn’t tie up your inheritance completely.