Another lump sum thread

[anonpher]

Regular posting anonymously.

I've read some great advice in this sub-forum over the last few years and, combined with having managed my own [modest] market based investments over a 5-6 year timeframe using online platforms, have formed some grasp of the concepts but still consider myself a relative novice.

I'm receiving a sum of money which is significant - approximately £700k net or any taxes and having settled any existing debts - and am looking to make long term investments.

My existing position is essentially net zero - I have 1 years annual allowance in a SIPP - and I can either use existing accounts or setup new ones. I'm talking to wealth management teams and am in several minds about paying 1% or more of portfolio value for professional advice.

My overall intention is to do as follows:

1) Meet household income needs from existing incomes
2) Contribute 2 x annual allowances to SIPPs (mine and spouses) from existing incomes
3) Max 2 x LISA and 2 x S&S ISA mostly from income but potentially supplemented by crystallising GIA gains (below) and using CG allowances
4) Invest remaining ~£700k lump sum in GIA mostly in my name but with some in my spouses to take advantage of CG allowances. We are both higher rate payers.
5) Junior SIPPs for one or more of my children. I'd also consider LISAs for those reaching 18 but don't want to go gifting money to children that can be ceremoniously pissed up the wall on their 18th.

I don't own a property but would aim to buy something in a 2-3 year timeframe depending on success of investments - if there are gains to realise in this timeframe that would help considerably, if not then I would just sit tight. The housing market looks precariously overvalued for a new entrant with a lump sum but some might say the same about shares and funds.

I would be interested in opinions on whether people would consider going for discretionary wealth managed services and essentially relinquishing hands-on control over such a portfolio, whether there is value in this area or whether I'd more likely just be shelling out for 'obvious' advice which to implement would carry the same risk levels as my own choice of investments. I would probably look to put 60-70% in funds in a diverse range of sectors and the rest in handpicked shares. The investments I've held previously have all done well but looking back over the last 5 years it seems anyone could have achieved this.

I'm not interested in residential property or crypto, but if anyone else has any ideas I'd welcome the discussion.

[Mr Whippy]

I’d hedge your bets and get a house/home now, if you don’t have one.

Save on rent in the meantime which is a guaranteed return.

[btdk5]

If you’re buying a property in 2-3 years any wealth manager worth speaking to will refuse to invest the sum you intend to use on the property over that time frame.

[SunsetZed]

Mr Whippy said:

I’d hedge your bets and get a house/home now, if you don’t have one.

Save on rent in the meantime which is a guaranteed return.

I agree with this.

It's easier to sit tight in a property you own than in a rented one with the money tied up in S&S

[anonpher]

btdk5 said:

If you’re buying a property in 2-3 years any wealth manager worth speaking to will refuse to invest the sum you intend to use on the property over that time frame.

Understood. This is where I would make it very clear that property would be a condition based outcome rather than a firm goal or intention. If investments perform well, I might realise some early gain to help fund a house purchase. If not I'd stay put.

anonymous said:

[redacted]

To clarify the LISA/ISA are for my wife and I, so it would be £16k + £4k plus the LISA bonus so £42k per annum combined. We wouldn't qualify for the first time buyer requirement so LISA contributions will be locked up for retirement.

I have some carry forward to utilise from 2 and 3 years ago, I did £40k last year, so I am thinking if I can stretch to £80k this year and next year I can utilise those previous years. I don't have the relevant earnings so these would have to be employer contributions funded by my Ltd.

SunsetZed said:

Mr Whippy said:

I’d hedge your bets and get a house/home now, if you don’t have one.

Save on rent in the meantime which is a guaranteed return.

I agree with this.

It's easier to sit tight in a property you own than in a rented one with the money tied up in S&S

I appreciate many (most?) people would think along these lines and they are good points. I feel rather bearish about the house market, I don't see much that I like for sale at the moment, what is there seems ridiculously overpriced since last year and I feel like I would potentially (for the only time in my life) be a very well equipped buyer (40-50% deposit, no chain) squandering a strong hand in a seller's market. I'm in an unusual rental situation in that my tenancy is secure, I've lived in it for years and the rent is below market value. I've explored the option of buying it but the LL won't. There's a risk I may have revealed a hand and can expect a rent rise but I had to explore the option. In any case I'm happy to sit tight and watch how housing pans out.

The obvious risk is piling heavily into shares and watching housing continue to rise whilst the markets slump. As said this would be a good hedge as I wouldn't necessarily have to do one or the other - it really comes down to whether I can afford the sort of house I'd like whilst still having a reasonable amount of capital left over to invest.

I am also interested in self-building potentially. This would be large, rural, and no way near London or the SE. It's another option I'd at least like to explore.

Edited by anonpher on Wednesday 1st September 16:31

[Mr Whippy]

I’ve been a bear on everything forever.

These days housing tends to “correct” through background inflation for years.

People just won’t sell if they can’t get their last-high price. Except for distressed sales.

In the meantime you need your cash making at least inflation to stay level... and last time it wasn’t clear QE would do what it did, and remain for so long, and inflate markets beyond expectations for a decade.


Who knows what’ll happen this time around.

But from a perma-bear... hedge your bets... otherwise being a bear just means losing slowly over time.

[LeoSayer]

Personally, I wouldn't use a wealth manager because I treat my family's financial / tax planning almost as a second job. Of course, there's the risk that I make a mistake but I'm comfortable with the decisions I have made over the past 20 years or so You may feel differently.

I wouldn't be looking to drop £700k on a share portfolio or a property unless I knew it was long term.

Once you buy a house (say) for £700k, you are in the same financial situation as someone who bought the house 20 years ago for £200k, has paid off their mortgage and the house is now worth £700k. How many such long-termers would sell their house anticipating a market drop?

A home to call your own is a wonderful thing but you seem to be in a comfortable position with your rental. The financials on renting vs buying aren't as clear cut as some would lead you to believe.

Ask yourself this. What would make you most unhappy...a 20% drop in the value of your house or a 20% drop in the value of your share portfolio?

[Franco5]

Strange system where a gifted millionaire can get gifted an additional £1000 a year by the state.

[TwigtheWonderkid]

LeoSayer said:

Ask yourself this. What would make you most unhappy...a 20% drop in the value of your house or a 20% drop in the value of your share portfolio?

A 20% drop in your share portfolio isn't offset by any gains. A 20% drop in house value is offset by the money saved on rent, while you were living in your mortgage free house.

[LeoSayer]

TwigtheWonderkid said:

A 20% drop in your share portfolio isn't offset by any gains. A 20% drop in house value is offset by the money saved on rent, while you were living in your mortgage free house.

You'd hopefully still get income from shares in the form of dividends, but losing 20% of the value on the house is much more palatable when you don't have a mortgage to pay off.

[anonpher]

Personally a 20% drop in house prices would annoy the hell out of me if I had just piled in with everything I could, because my instinct is to believe they are overvalued and I'd rather have waited and had something bigger/nicer.

Share prices I'm not emotionally attached to and would figure as long as I hold my nerve they are most likely to recover over time as they did last year.

I know this is irrational as the same arguments could be extended wither way - but I guess its what comes with spending half your life not owning a home and not caring too much for one either.

If I did buy a house I would aim to put 40-50% down using no more than half of the capital and mortgage the rest.

[dphiggins007]

If you purchased a house and the value dropped by 20% you only lose if you sell. It’s your home and if you intend to live there a while prices will like shares come back again. Meanwhile you are living in the comfort of your own home.

[DonkeyApple]

LeoSayer said:

TwigtheWonderkid said:

A 20% drop in your share portfolio isn't offset by any gains. A 20% drop in house value is offset by the money saved on rent, while you were living in your mortgage free house.

You'd hopefully still get income from shares in the form of dividends, but losing 20% of the value on the house is much more palatable when you don't have a mortgage to pay off.

Yup. Ignoring dividend income shows the general flaw in the comparison. And most people don't appreciate the impact of leverage on their home until their lender points out that the 20% fall is 100% loaded onto their equity not the lenders and as a result they've now lost everything.

But in Britain we are obsessed by property ownership and this does tend to skew our thinking.

In reality, depending on geographic region, property type etc, a £500k unleveraged blue chip portfolio can be the smarter option over a £500k unleveraged property. It's not a cut and dried answer either way.

Let's say you have £500k and buy a property outright. I modest family property in a modest area. You now get to live without paying rent and in general security. You do have all the costs of ownership, many of which were buried within that rental charge but let's take a wild punt and say the net monthly saving is £1000. But £500k held in the FTSE 100 would currently yield you £1500/month. You'd actually trade some of that yield for capital growth potential so income would closer to £1000/month etc.

The two options then transpire to require the use of tea leaves for decision making. Both have years when they outstrip inflation, years when they lose ground. Both have years when costs take a high toll, arguably property is the much higher risk in that regard. Both are at risk of taxation changes. Historically, property corrections take much longer to claw back to break even.

But what you can see is that if you have no wealth then the mantra of not paying someone else's mortgage and instead paying your own is really good basic advice of income and lifestyle stability exists but once you have wealth the scenario is very different. It's not as simple as 'you save rent'. Instead you're faced with two viable investment option that ultimately boil down to personal choice.

Now imagine the scenario in the SE of England. You are a higher rate tax payers so you clearly aren't going to go and live in a cul de sac in Dagenham and take up professional knife fighting but that modest 3 bed property in a nice area is now in the region of £1-£1,5m so leverage becomes a key factor. You're going to have to borrow in order to buy a property so this changes the dynamic considerably?


To buy let's say you need to borrow £500k which would cost around £1500/month on a repayment mortgage. You also need to be able to predict the future quite well in regards to whether you are going to have children that require property space and local schooling, whether you need to consider a garden as well as parking for a car that may be of use later on. So in order to buy not only do you have to take on the burden of £500k debt but you also are fixing your short/medium term lifestyle parameters in stone and having to guess quite wildly what a lot of those will be.

Conversely, you could rent. £3,000/month. Dead money? Well, you have that £1,500/month portfolio income and you don't have that £1,500/month repayment mortgage so yet again you're looking at a financial difference that is arguably negligible as opposed to the killer differential caused by the absence of wealth. Plus, if you get that 20% property correction then it's actually 40% to you due to the leverage and your lender is going to re margin you because they've got you on a 2-5 year rollover contract for that specific purpose. Not only has your £599k investment dropped to £300k but your lender now wants you to send them cash to replace the lost margin potentially.

In many ways the quality investment portfolio has far greater potential tax advantages, similar capital upsides, much lower costs of entry and ongoing costs. While renting fixes ongoing property costs and gives huge lifestyle flexibility.

If you don't specifically know where you want to stick fixed roots for a decade or two. Don't categorically know how many mouths you have to feed over the next decade etc then continuing to rent while you fill up your lifetime pension allowances and waiting until you have more clarity in your life as to where you want to live and what you want to live in is a bit of a no brainer. Renting would be king and by far the smartest option. Ie you rent someone else's property risk, you don't carry any debt risk and you maintain freedom of movement and choice all while claiming back the income tax on £80k of higher tax earnings.

You see, it's the pension allowance that potentially makes things a no brainer. Two higher rate tax payers, suddenly able to invest £40k/annum each and critically, able to claim back the income tax on that £80k. There's risk of the allowance changing but even if you can only claim back basic rate you're looking at £1000/month back and in best case scenario getting towards £3,000?

Why would you ever lock £500k into a property when you can use it to claw back income tax amounts that could be greater than any rental costs and on top of that receive a dividend income and hold capital growth potential? Under certain circumstances you'd have to be mental to buy property.

Once you've hit your lifetime allowances or your lifestyle changes to where being in a fixed home is more valuable then the dynamic changes but until then it tends to be renting that's the smart financial move if you have wealth of the amounts we're considering here.

And don't forget, if you want to adopt the potential upside of leverage then it's easy enough to gear up your investment portfolio to the same levels of gearing your property would be at.

As for the OP's question as to whether he should use a professional wealth manager. Absolutely. They are invaluable and worth every penny. Sit down with half a dozen reputable managers and listen to each of their 'house' pitches and ask them each specifically about the portfolio weightings advised for someone in your position. That should give you a really solid understanding as to how the market is generally structuring their portfolios at this moment in time so for zero cost you will have a skeletal framework upon which to build and manage your portfolio. You can then check back in with the industry every few years to listen to their updated pitches. That way your basic investment advice is paid for by their clients.

Investing isn't difficult so long as you stick to investing. For most people the true benefit of a wealth manager is not that they could outperform or give amazing advice because generally speaking they won't and it's not actually their job to do so despite the slightly flawed view on PH that somehow they are but instead, the value comes from the manager stopping the client going Ladbrokes with the money. Most retail investors are actually insane gamblers who like all gamblers piss loads of money away but unlike the gamblers who know they're gambling they don't even get a boner from their losses.

It's tax planning that's critical and the professional service that I would pay for.

People always seem to start out these projects by talking to a wealth manager. But building a suitable portfolio that will generally track the underlying market is not where the killer returns are for the smart investor. The smart investor can technically be their own wealth manager. The killer returns in the UK at this level of wealth come from being tax efficient. The important professional in a situation such as this is an accountant. What you want to know is precisely how much tax you can claim back, how much other taxes you can save and how to do it. The tax benefits can dwarf any potential returns even to the point of exceeding rent costs!

Step one is to sit down with an accountant and establish precisely what your returns are on taking £500k cash and converting it as efficiently as possible. That's your big number in the equation. That's what you need to spend money on. And you can't make any kosher decisions until you know that information.

[NickCQ]

How old are you, OP? The right strategy for a 25 year old in this position is v different to an 80 year old.
Also, how big is £700k in relation to your current or expected future income - is this a one-off windfall or part of a high earning career / business that should see you get similar distributions in future?

[NickCQ]

DonkeyApple said:

Let's say you have £500k and buy a property outright. A modest family property in a modest area.

[DonkeyApple]

dphiggins007 said:

If you purchased a house and the value dropped by 20% you only lose if you sell. It’s your home and if you intend to live there a while prices will like shares come back again. Meanwhile you are living in the comfort of your own home.

More importantly, it's much easier to pretend the 20% fall hasn't happened as you aren't being emailed valuations every week.

Of renting, you still have the bulk of the comforts plus the schadenfreude of knowing your landlord and all your peers are sitting on massive losses.

[anonpher]

NickCQ said:

How old are you, OP? The right strategy for a 25 year old in this position is v different to an 80 year old.
Also, how big is £700k in relation to your current or expected future income - is this a one-off windfall or part of a high earning career / business that should see you get similar distributions in future?

Early 40's so am looking at another 20-25 years of working.

This lump is entirely a one-off like inheritance or winnings, not connected to earnings and not to be repeated. I stand to inherit nothing in the future so no other anticipated windfalls at any point in my life. Ltd company income is likely to run in the region of £200-250k for the foreseeable future providing £100k split incomes and 2 x SIPP allowances after taxes and expenses. Location is rural provincial England, traditionally offering good value and overlooked/underrated compared to more popular regions, but house prices have gone absolutely mental in the last year which is why I am reluctant to go piling in with everything I will have at what feels like the top. The sort of property I would buy, and indeed already rent, is rural with a large footprint and well equipped for home working, so exactly the market that has risen most prominently in the pandemic.

DA thankyou for taking the time with your post above - that is some very insightful info indeed. I agree entirely with your position on tax efficiency and the benefits to be realised and that's really what underpins my intention to invest in a S&S portfolio, the question is really whether that's in its entirety or the balance after funding a house purchase.

[DonkeyApple]

I think a real issue is that everything feels toppy at the moment and we haven't yet really seen any economic shake out or rebasing due to Brexit or Covid. All we are seeing at the moment is a potentially synthetic employment market and a massive washing in of new money. On top of that we have to try and guess where the inevitable taxation rises will fall, whether they will be based on consumption, assets or allowances or across the board, which seems more likely. Plus, with many family homes being in the hands of the Boomers and that generation has entered the dying off phase, the supply of family homes is going to increase while potentially the ability of the smaller and poorer generation to follow may not be able to soak that supply up at current values etc.

We can probably make a best guess that tax allowances will be cut, property taxes rise, supply will increase and interest rates remain low.

In many ways there is a valid argument for not being in a particular rush but to start moving the cash into the various wrappers to obtain the big tax breaks while intending to use dirt cheap debt to procure a family home.

Setting out to move £500k into tax wrappers over 5-7 years while withholding £200k to act as a deposit for the eventual property may transpire to be the best course. In simple terms, using 1% debt cost to clawback 20% of income tax etc?

Would it be rude to ask how much your target properties currently cost and how much rent you currently pay?

[kiethton]

dphiggins007 said:

If you purchased a house and the value dropped by 20% you only lose if you sell. It’s your home and if you intend to live there a while prices will like shares come back again. Meanwhile you are living in the comfort of your own home.

And even then, a 20% drop is equivalent to 3-6 years rent depending on where you are in the country...

[CalNaughtonJnr]

If you are over 40 then you are too late to get into a Lifetime ISA so that is one less option!