where and how to invest a chunk of money?
August 4, 2011 2:49 AM   Subscribe

Let's say we have £25,000 sitting in a current account and no debt, other than a very low-rate mortgage. We can comfortable can add approximately £5,000 a year to this amount. Investment advice please!

Wanting to invest this long-term -for at least ten years, possibly up to twenty. Would like some flexibility on this since there's obviously no way to know what the future holds and when and why we might need or want to access the money in the future.

We're not particularly interested in a typical pension if it means we can't access the money without hefty fees until we're 65-70 and properly retired (I have a separate public sector pension which is fairly decent, I'm told). If it matters, we're married, no kids, employed in fairly stable industries, etc. We have an easily accessible emergency fund in addition to the £25,000 already.

I know nothing whatsoever about investments, pensions, etc. Nothing at all. I do plan to see a fee-based (not commission based) financial advisor but I want to be able to walk in with some knowledge and background of the options available. In the UK, if the £ symbol didn't clue you in.

posted by Wroksie to Work & Money (14 answers total) 3 users marked this as a favorite
£5k a year fits very tidily into your ISA allowance. £25k is basically two people's ISA allowance for this year, plus £5k to put somewhere else - fixed term bond? - for a while, then tip back into an ISA in another year. The catch is that some ISAs give frankly rubbish interest rates, so you have to look around for a decent one, and depending on how much income tax you pay, you may be better off getting something that's not an ISA, and claiming the tax back afterwards (guessing that's not likely if you're in a position to be saving £5k/yr though).

You can have a cash ISA and a stocks and shares one; the cash one has nice tidy numbers that get bigger every year, stocks and shares are usually more of a long term investment, will charge you some setup fees and so on, such that even if the fund is making money, attempts to get your money out in the fort couple of years may lead to getting less than you put in.

It's probably worth thinking a bit in advance whether you care what companies you may be investing in, and whether it would suit you to specify any ethical criteria to your investments, e.g. people can make money by getting oil out of Sudan or stuff for mobile phones from Congo, by producing cigarettes or cluster bombs; it's up to you whether or not any of your money is involved in those things (personally I've gone for a mix of '3.5% on a cash ISA? gimme!' and funds that avoid military stuff for the rest of it).
posted by Lebannen at 3:15 AM on August 4, 2011 [1 favorite]

... attempts to get your money out in the first couple of years ...
posted by Lebannen at 3:16 AM on August 4, 2011

A cash ISA or NS&I Savings Certificates (this choice depends on your income tax bracket and the terms/rates of the best Cash ISAs, which change regularly). If you're a little more risk tolerant, an index tracker. Given the amount you're talking about and your level of interest/expertise, ignore anyone who tells you to invest in an actively managed fund in particular regions/sectors or, worse still, in particular companies. Read The Long and the Short of It.
posted by caek at 3:29 AM on August 4, 2011

And given it's probably the biggest or second biggest investment you'll ever make, you probably want to learn a bit more about your pension.
posted by caek at 3:30 AM on August 4, 2011

Wroksie: other than a very low-rate mortgage

Consider this in the mix as well. If one of you is interested in the possibility of perhaps having sprogs and being able to afford the luxury of staying home with them, future you will potentially be very grateful for having paid off your mortgage early. it is typical for the salary of one partner to meet the needs of bills and insurance whilst the other meets the needs of the mortgage, so not having that burden gives you a lot more flexibility in how you raise your family.

Otherwise, nthing ISA.
posted by DarlingBri at 3:37 AM on August 4, 2011

Response by poster: Yep,Caek, I'm in a new job and I have a meeting with the pensions officer next week - I know the basics (as in what percentage I'm contributing and how much my employer is contributing) but I plan to leave the meeting with a proper understanding.
posted by Wroksie at 3:37 AM on August 4, 2011 [1 favorite]

Yeah; I'd also be tempted to stick the majority of it (20k?) on your mortgage, even if it is at a low rate. If you have, say, a 20 year mortgage and reduce it to 17, then in 17 years time you're effectively going to reap the benefits of 36 x (several hundred pounds).

If you did need some of that money quickly, you can probably take it out of your mortgage again without too much difficulty.
posted by Hartster at 4:33 AM on August 4, 2011 [1 favorite]

You have an emergency fund, make sure it is big enough, e.g. cover living costs for 3 months, preferably 6. You're also looking at your pension as you should.

In general, before boosting savings reduce debts, i.e. the mortgage, unless it charges more than savings will pay after tax. Check when excess payments are applied, some lenders take your money but only apply it against the mortgage on the commencement anniversary. You should be given the choice of reducing the term, i.e. paying the same each month for a shorter time, or reducing the repayments, i.e. maintaining the term. You can afford it so reduce the term.

Have a savings strategy, e.g. getting into buy-to-let property. Plan ahead, if you expect to have kids then allow for future education costs.
posted by epo at 4:58 AM on August 4, 2011

"charges more" -> "charges less", sigh!
posted by epo at 4:59 AM on August 4, 2011

OK, firstly an ISA is just something to protect from tax, rather than an investment in its own right. (it's post tax saving as opposed the pretax saving in the form of a pension).

I would go 100% for stocks and shares ISA -don't bother with a cash ISA for this money -you already have cash in an emergency fund.

Ask your advisor about investing in 'index' funds, or 'tracker' funds- they match the index (FTSE100 or All Share or international market, whatever, have very very low fees (look for 1% or less...dont' accept more than 1.5%).

Your advisor may tell you to go for 'mutual funds' with investment managers -these can do well but over the long term an Index fund beats them because index funds have low low expenses. Have a read of the Bogles Guide to Investing.

You can pull out money whenever you like but of course as its invested the value will and does fluctuate.

Note: you can only invest 10k per year per person in a Stocks and Shares ISA and if you have any cash ISA for the year then that reduces what you can put.
posted by Flamingoroad at 5:11 AM on August 4, 2011

Do you have an ISA yet?

Current ISA Rates are about 3-4% p.a. (I think) but that is Tax-Free interest and hence more than you will get on a Fixed Rate Account (that you will have to pay tax on).

What is your appetite for risk?

Low risk side you could put £20k in a 12 Month Fixed Rate 'Bond' and get around 3-4% p.a. at the moment. Early exit costs on these are usually loss of 90 days of Interest. with Rate resets every 12 months. no risk of capital and guaranteed return. (unless the bank itself collapses).

Higher risk would be to put it in the "Market" = shares etc.. but hwo do you feel about the market / GFC - you can make higher returns but you can actually end up with LESS than you started. You'd probably never loose it all but how would you feel if in 3 years that £20k was now £15k?

You can put it in a Managed Fund - but then you need about 7% pa.a. on the Fund to make more than a Fixed Bond (due to Management fees of about 2%). Has the market recovered?
posted by mary8nne at 5:58 AM on August 4, 2011

I mean a Cash ISA
posted by mary8nne at 5:59 AM on August 4, 2011

Another vote for dumping £15k into NS&I Savings Certificates (it's the maximum you can put in) and then £5k into two Cash ISAs (one for you and one for your other half). Although you can get at the money if you really need to, be aware that you'll lose a hefty chunk of the tax free interest - so only do this if you're comfortable with the fact that in order to get the best out of it, you really should consider this money "locked away".

I read somewhere that if you're in the upper tax band (which I'm guessing you probably are with that amount of savings) then the rate NS&I are offering means that you'd need to find a savings account offering 11% APR to match it.

If you have any more money left over, then I'd look at overpaying on your mortgage.
posted by mr_silver at 6:20 AM on August 4, 2011

Does your low rate mortgage have a redraw facility? If so, then assuming the rate is not so low that the bank is losing money on lending it to you compared to investing it in other things, then paying down your mortgage early will give you a better effective rate of return on those payments than putting them elsewhere, if for no other reason than that the return comes in the form of money you don't need to spend rather than as tax-assessable income.

Once the principal on your mortgage is down to a hundred quid or so, you'll have built a substantial line of credit that's accessible to you at your low mortgage interest rate; at that point you stop your mortgage repayments (so the mortgage isn't paid out, which would make your redraw line-of-credit disapper) and start investing your £5,000 a year plus what would otherwise have been mortgage repayments into something that makes a real return.

From that time until the mortgage end date, you'll be paying bugger-all interest on a barely-alive mortgage, and your redrawable amount will shrink as the end date approaches. By the time it's shrunk to nothing and you finally pay the mortgage out, you should end up well ahead of where you'd be if you'd simply stuck to the original mortgage schedule and invested your £5,000pa elsewhere.
posted by flabdablet at 10:36 AM on August 4, 2011 [1 favorite]

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