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?
NM

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.

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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.



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