I was recently sent a link to a thread on a well-known Internet forum aimed at mums, where the poster was asking for advice on what to do with an unexpected £250,000 inheritance. The willingness of people to offer advice with so little information on the individual’s circumstances, that could be potentially disastrous to the individual, was astonishing.
Early on one reply was to pay off her mortgage. Whilst this might seem common sense, what if the poster has early repayment penalties or is on a pre-financial crisis interest rate so low they can earn a higher interest rate than that they are paying? It could be that their earnings have reduced since they took out the mortgage meaning they wouldn’t get the same mortgage today, effectively trapping them in their current property. We didn’t even know if the poster had a mortgage!
Purchase a buy to let property was a frequent suggestion. There was no consideration as to whether the poster already owned a property and so would be subject to the 3% additional stamp duty and no one thought to mention the 18-28% capital gains tax on its eventual disposal. One person’s reason as to why a property was a good idea was that it was “an appreciating asset that generates an income” – that may be the hope, but it is far from guaranteed.
After a recommendation to invest it in a personal pension, someone pointed out that the maximum contribution was £40,000, someone else corrected this highlighting you can use the previous three years allowances, so it was in fact £160,000. However, no one pointed out you can only get tax relief on 100% of earned income in the current year (or £3,600 if lower) meaning the individual could potentially get limited tax relief on the contribution and still be taxed on withdrawals! The impact of the tapered annual allowance or the interaction with existing pension schemes she was a member of was all neglected.
It is likely that some of these suggestions are appropriate but without a full understanding of her circumstances, tax position and objectives, or a proper knowledge of tax and investments, she is likely to make some very expensive mistakes.