Scenario: “I have recently inherited £30,000, which is quite overwhelming for a millennial. I am currently working and have a one-year-old. I would like to know what I could do with this sum to make the most of it!”
Pay off your debts:
First & foremost, let’s consider high interest debt. Lots of us millennials/ gen z have likely made some money mistakes in our past, whether it’s credit cards, loans or Buy Now Pay Later (BNPL) type financing. Debt is not only stressful for our mental wellbeing, but it’s likely you’re paying a very high APR or “Interest” on it. Even if you’ve been financially savvy and moved your high interest credit card to a 0% card via balance transfer, you still owe that amount and the banks have to make their money somehow.
The base rate interest has also been increased recently – three times in a year and this is making the cost of borrowing incredibly expensive. With rising interest rates, if your mortgage or loan isn’t fixed, you’ll be the one seeing the effects. So, if you’ve received inheritance and have high interest debt, that should be your first consideration. It will also give you a lot of peace of mind!
Set up an emergency fund
An emergency fund is key no matter where you are in life. We recommend at least three months expenditure in an easy access account like a cash ISA. If you are off work for your health, or any other unexpected reasons, or in need of emergency home improvements, this will provide the safety net you need. Also, if you have children, it is important to also bear them in mind.
Deposit for a property?
After debt, if you aren’t currently on the property ladder and want to be, using your inheritance towards a deposit is a good option. There will always be the rent vs. buy argument, however when looking long term, a property could be a good investment. By buying a home, you are investing in property, you’ve got a real asset and a long term investment. You’re of course tied into a long-term loan for 25 years for example, but as property prices rise, you own that asset now and will benefit from the uplift in value.
On the basis that you’ve got no debt and have set up an emergency fund of cash, you can start to look at investing. The first thing you want to consider is the tax wrapper.
What is a tax wrapper? A tax wrapper in simple terms is essentially the bucket your money sits in.
The wrapper your money is in will determine the tax you pay.
Examples of tax wrappers
- First example of a tax wrapper is an ISA. You can have a Cash ISA or a stocks & shares ISA (which is where your money is invested in stocks and shares). The huge benefit of an ISA is that your investment grows tax free. Any dividends or capital gain that you get is not liable to any tax. You can put £20K per tax year into an ISA. You can also split between a cash ISA & Stocks & Shares ISA. It is a tax efficient way of building a tax free “pot” and its often easily accessible – you can take money out as and when you need.
- A Pension is also a tax wrapper. It’s designed to be a savings pot that you will accumulate to provide for retirement. The difference from an ISA is that you get tax relief when you contribute. This means that if you put in £800, what’s actually paid in is £1,000 as the government adds a 20% tax credit. Now you can’t access a pension until 55, soit’s a long-term investment. But the earlier you save, the more you benefit from compound interest & long-term market performance
- LISA – a lifetime ISA is a relatively new scheme that the government has started to encourage young people to use in order to save for a house or retirement. Any amount you save, the government will add a bonus of up to £20K and this can be a cash LISA or Stock & Shares LISA. Therefore, the maximum per year that you can invest is £4K, so the government will top this up to £5K. The only thing to remember with LISAs is that the maximum property purchase value is £450K and if you want to take your money out,the government will claw back the bonus. If you don’t use it to buy a house, you can access the pot tax free from age 60.
Save for the next generation
Finally, if you have children, now is a great time to set them up for the future. If you have covered the points above, you could then consider putting money away for your children. Firstly, you could think about opening a Junior ISA (JISA). You can save £9,000 this tax year into a Junior ISA, which again can be either a Cash JISA or a Stocks & Shares JISA, which they can access when they turn 18. Alternatively, you can also make pension contributions on your child’s behalf too, to a maximum of £3,600 gross per year.
Of course, this is a lot to think about and, understandably, it might still feel overwhelming. At Kingwood, we can help you think about your long-term planning, whether that is due to receiving inheritance, buying a property, investing in a junior ISA or just simply help you with your personal finances. A financial adviser can be a great option.
The value of your investments can go down as well as up. You may get back less than you invested. The above does not constitute as advice.
Kingswood is a trading name of KW Wealth Planning Limited (Companies House Number: 01265376), regulated by the Financial Conduct Authority (Firm Reference Number: 114694) with a registered office at 13 Austin Friars London EC2N 2HE.