Saving for retirement does not always pay off. “Who knows if I will even make it that far,” said Lottie Gross, 31. “My mum never did. She always planned and never got the reward.”
Ms Gross’s mother passed away in July after a brutal battle with cancer, leaving her and her brother an inheritance. Ms Gross herself has just been diagnosed with rheumatoid arthritis. “I think ‘f--- it’, I want to enjoy my life now.”
Ms Gross’s share after tax is around £60,000 and she and her brother also jointly inherited her mother’s house. “I moved in to live with Mum before she died and I would like to stay because it was my childhood home,” Ms Gross said. Their plan is for her to buy her brother out, estimated to cost between £225,000 and £250,000.
Ms Gross has no dependents and is self-employed, earning between £45,000 and £60,000 per year. She is already a homeowner herself, after purchasing a two-bedroom bungalow in 2020. Her question is: “Should I keep my bungalow and let it out, while I buy my brother out? Or should I sell the bungalow, buy my brother out, and do something else with the leftover cash?”
She has benefited from house price growth and should be able to release £110,000 to £125,000 in cash from the bungalow, but will be charged a £6,000 mortgage early repayment charge. Including the money she is inheriting, her total pot would be between £164,000 and £179,000.
Her first option is to put all of this money towards buying her brother’s share of the house with a small mortgage. She could also only use part of the money, borrow and invest the remainder.
“I have not invested in stocks and shares before but I am definitely inclined,” Ms Gross said. She would like to increase the value of her pot over five or 10 years and then use it for home improvements.
The third option would be to keep the house and the bungalow. She has consent to let from her lender and has signed a tenant to rent the property for seven months for £10,000.
“I am trying to figure out if it is a terrible idea to keep both properties. Who knows what the housing market will do over the next decade,” Ms Gross said.
Elena Todorova, director of SPF Private Clients
If Ms Gross sells her own property and we assume a worst-case scenario – the need to repay £250,000 with £164,000 – she will need to raise £86,000. Taking out an £86,000 loan is a safe option. Fixed-rate mortgages currently start from 4.9pc with monthly payments from £571 for a 20-year term to £422 for a 38-year term.
Keeping two properties and two mortgages is riskier. Being a landlord could also be time-consuming and disruptive to Ms Gross’s normal job.
Ms Gross is worried about property price movements over the next 10 years. There are varying forecasts, with Savills estate agents predicting house price falls of up to 10pc next year, followed by a swift recovery with growth returning to 1pc in 2024, 3.5pc in 2025 and 7pc in 2026.
If she keeps her bungalow as a buy-to-let, assuming the loan is £190,000 on a property value of £300,000 (giving £100,000 in equity) and she takes an interest-only, buy-to-let mortgage, her payments would be £877 on a rate of 5.1pc. Assuming monthly rent of £1,429 (based on her current tenant), she will generate a £552 profit.
Ms Gross will have to pay income tax on this, as well as insurance costs and agents’ fees. If Ms Gross lets her main residence, her mortgage on the inherited property would be higher and she will need a £190,000 loan.
Using the same fixed rate as above, her new payments would range from £1,251 per month (20-year term) to £925 (38-year term). In the first scenario, she can reduce debt, consolidate the mortgage and keep low monthly payments to allow for more disposable income to enjoy life.
In the second, she will have larger exposure to debt, dedicating time to looking after a rental property while at the same time diversifying risk, investing in two assets and potentially selling one of them at a later date, hopefully benefiting from a capital gain.
James Batchelor, chartered financial planner at Progeny
If Ms Gross uses the cash from her inheritance to buy out her brother and sells her own home, she should have between £104,000 and £119,000 left. I would recommend she sets aside an emergency fund of six months’ expenditure in an instant-access cash account. She would have in the region of £100,000 to invest.
Although she has a very small pension fund, I do not recommend Ms Gross putting money into it at this point, as this would not be accessible until age 57.
If she is genuinely looking to maximise growth and can tolerate investment volatility, the cash should be entirely invested in shares. If she is more risk-averse, she could invest a lower proportion into shares and some into bonds. In either case, this should be achieved via a passively managed, low-cost, globally diversified fund.
Ms Gross should consider investing £20,000 into a single fund in an Isa that matches her risk tolerance – so a multi-asset one if she does not want to only buy shares – as this will exempt the income and capital gains from tax. She should then invest the rest into the same fund via a “general investment account”. Ms Gross could then sell £20,000 from the GIA each year and use it to make further annual Isa contributions.
Even though the annual capital gains tax-free allowance is being cut from £12,300 now to £6,000 from April and to £3,000 from April 2024, it should still be possible to get the majority (if not all) of her invested funds into the Isa over 10 years without ever paying any capital gains tax.
Over the last 25 years, global equity markets have returned an average of 9.9pc per year, though the actual amount has varied substantially. Based on this average, if Ms Gross invests £100,000, after 10 years she would have £257,026 – an increase of £157,026, though the real-life outcome could be very different.
When she wants to take income from the investment, this can be done in one of two ways.
Ms Gross could switch her funds into an income-yielding version of the same fund, if this was available, and take the natural income. This might be in the region of 1.5pc, or £3,800 per annum. Alternatively, she could take withdrawals of capital. Using a maximum 4pc withdrawal as a sensible rule of thumb, she could perhaps take £10,200 per year from her pot.
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