Money Makeover: ‘I’m downsizing and retiring – how should I invest £400k?’ (2024)

Many of us dream of having hundreds of thousands of pounds in cash at our disposal, but in reality deciding what to do with such a large sum can quickly turn into a nightmare. Interest rates are at rock-bottom, annual Isa contributions are capped at £20,000 and pensions tax relief could be limited by the Government.

Gene Wilcox, 64, from London, faces such a predicament. She is about to sell her home in the capital for £875,000, downsize and move to Hove in East Sussex to be closer to her children. She currently rents a property in the area for £1,200 a month.

The plan is to buy a home for around £500,000, leaving her with a considerable cash sum. Complications do not end there, however. Next year Ms Wilcox plans to retire and is unsure how to fund it.

As it stands she earns £2,800 a month. She rents out a room in her London property for £1,000 a month and has a buy-to-let, worth £350,000, that provides £1,300 monthly.

Ms Wilcox also gives yoga lessons for £500 a month from a studio she partly owns, which is worth £100,000. Selling her home and studio will mean her monthly income drops to £1,300 but she will not have to pay £1,200 in rent. When her state pension begins at age 66, her income will rise to £2,050 a month.

There will be no mortgage and no rent, but Ms Wilcox still needs more income: she has a car payment plan that costs £650 a month and has an outstanding balance of £14,000.

Luckily, there are enough assets to generate income: some £400,000 from property sales, a £40,000 pension and a small Isa. Ms Wilcox is already taking out £5,000 a year from the pension.

She asked: “Should I use the cash for another buy-to-let property or put the money into a savings or investment account? Property has worked for me in the past and I understand it, but I do not want my income to be too tied to one market.”

Another concern, Ms Wilcox said, is inheritance tax. Her estate is sizeable and is not in a fit state to avoid the dreaded death tax.

She added: “I am also worried about the Financial Services Compensation Scheme’s £85,000 protected savings cap, so do I need to split my money between a number of accounts when Iam about to buy the Hove property?

“Also, is there a way that I can use my pension and Isa to invest the cash to minimise capital gains tax? I would be a conservative investor but I would not mind risking around £50,000.”

Felix Milton, chartered financial planner at Philip J Milton & Company, said:

Assuming Ms Wilcox is able to buy a property in Hove within six months of selling her London home, she does not have to worry about breaching the £85,000 FSCS cap, as she would qualify for the scheme’s “temporary high balance” protection. This covers up to £1m for six months.

If she expects to hold the cash for longer, she should put £85,000 into a number of easy-access savings accounts. The best rate at the moment is 0.5pc from the likes of Tesco Bank and Marcus. After she has bought her Hove home and sold the London property and yoga studio, she will have around £400,000 in cash.

The first thing to do is repay any debt, such as the £14,000 car loan, which will save future interest accrual and reduce her expenditure by £650 a month.

She should invest the remaining amount, after putting aside some emergency cash, into a global portfolio of shares rather than another buy-to-let. If she buys another property for, let’s say, £375,000, she’ll have to pay stamp dutyof £17,500. Any income would betaxable at 20pc and any profit she makes ifshe sells the property above her capital gains tax allowance of £12,300 would be taxable at 18pc. These rates could rise to 40pc and 28pc if she became a higher-rate taxpayer.

On the other hand, £375,000 invested into shares that pay a high income, such as via the Majedie Investments investment trust, would generate around £15,000 a year, assuming a 4pc yield. It currently yields 4.9pc and trades at a 16pc discount, so the returns could be even higher.

Dividend income would be tax-free up to £2,000 a year; any income above this would be taxable at 7.5pc for a basic-rate taxpayer. Any capital gains above the allowance would be taxable at 10pc. Ms Wilcox should also move £20,000 into her Isa every year to avoid paying these taxes altogether.

Warren Shute, independent chartered financialplanner, said:

Ms Wilcox would like to minimise inheritance tax, but her priority should be to secure a retirement income and account for the potential impact of care fees in later life.

Ms Wilcox’s estate will be worth £1.2m when you add up the value of her Hove home, rental property and likely investment portfolio – excluding her pension – of £376,000. One option would be a “whole-of-life” assurance policy, which pays out a lump sum on death, free of inheritance tax, as long as premiums are paid. She could also set up a gifting strategy to start giving money away to a trust or to children or grandchildren.

In terms of retirement, after she has sold the London home and yoga studio she will lose £1,500 a month in income but will be cash rich, so it is important that the money be invested to provide an income.

Investing in low-cost index funds that track global stock markets is a better option than buying another buy-to-let. I recommend buying a portfolio of 60pc stocks and 40pc bonds, such as Vanguard’s LifeStrategy 60pc Equity fund, which costs 0.22pc a year (plus an Isa fee of 0.15pc) and yields 1.2pc. To minimise capital gains and inheritance taxes she should add to her pension. Her tax-free contributions will be capped at the “money purchase annual allowance” of £4,000 a year because she has already started to draw an income. She can also put £20,000 a year into an Isa, although this will form part of her estate.

This will give her more than enough to live on. Her monthly expenditure of £3,000 will drop to £1,150 once she stops paying rent and the £650 car payment, assuming she pays off the loan when she sells her home.

The sale of her properties and pension, minus debt and six months’ emergency cash, will leave her with £408,000. Assuming she still wants £3,000 a month, her investments will need to provide £900 a month or £10,800 a year. This would mean drawing just 2.6pc a year, when she could reasonably draw 4pc or £16,320 a year.