Saturday, 30 April 2011

What to do with my Windfall?

Just read an article at The Digerati Life about what you should do with a windfall. This proves particularly timely as I've just had an unexpected sum of money arrive.

I've been a bit remiss in not worrying at all about my pension. But I mean that is the point isn't it? We give our money to someone else to look after, pay them a fee, and in return trust in their financial skills to turn our pot of money into a massive pot of money so we can survive for a few years once we retire.

However, if you're a higher rate tax payer in the UK then you should really be checking your sums. If your pension is taxed at source like mine is by my employer then you need to claim pensions tax relief. My pension provider does this automatically and a nice little sum is added to the amount that I put in. The recession has done for my employer's contributions which is a huge bummer but then I should have got a new job when that happened - that's my fault for being too lazy and indoctrinated to change jobs. Anyway, another story.

Back to the pension dilemma. I checked my statement recently and discovered that the amount Standard Life added back in pension tax relief was the lower rate of tax.......whooop, whooop, shields. Captain we have a problem! Jumped on the phone to them and apparently I should have told the tax department this and they would adjust my taxable benefit for the pension payments.

Long story cut short, I have since had four new tax codes arrive while they figure out their maths properly and a nice little cheque arrive on my doorstep. While not in the same league as the article linked above where they pretend they have $100,000 to spend, my £4,500 is pretty much the biggest cheque I've ever seen.

Now, I know what everyone out there in personal finance land will think, "That money should go straight into his pension fund, that's where it should have been going." Well, yep, that's what I thought too but then I thought a bit more and decided it'd make a decent post to talk about the various alternatives to that:

What to Spend My Windfall Dosh On?
1. An iPad2 (oh god it's so shiny and yummy)
2. An Asus Transformer (lordy, it's just about as shiny and yummy as the iPad)
3. Put it all in the pension fund
4. Put some of it in the pension fund
5. Pay off some of the mortgage
6. Put some of it in this year's cash ISA
7. Send it home to NZ where it can earn a higher rate of interest
8. Pay off the credit card debt incurred in 'The Awful month of April'
9. Put it in the stocks and shares ISA
10. Leave it in the bank account
11. Invest in me and go do some training in something interesting
12. Use it as a loan to me to start up a business
13. Go on a super duper holiday
14. Put it into the house. eg. electric garage door, new sockets in the house, a dishwasher, etc.

Now 1 and 2 are mutually exclusive. I don't need both. Actually I don't need either of them and it's not particularly frugal nor sensible to waste money intended for my retirement on a gadget that won't be around come then. 13 isn't really a goer either as I've just been to NZ for 3 weeks in January and two mega holidays would just be showing off.

So what's the most sensible thing to do? According to the linked article above:
Use it to first get rid of your debt or to reduce your credit card debt.
Create an emergency fund by squirreling your windfall into highly liquid savings accounts or in a high yield free checking account.
Fund longer term financial objectives like the goals to save for college or to save for retirement.
Invest in an index fund.
Pay down your mortgage or other “good” debt.
Clearly the biggest impact financially will be to pay off the credit card debt - that's only £350 though, leaving another £4000 to spend. The next thing to do for me is to add to my ISA. Another £3,000 in that will take me above £10,000 and put the ISA into another % bracket.

That leaves £1000. By rights it should go into the stocks and shares ISA and hopefully earn more than inflation takes away. But paying off the mortgage is so attractive and maybe, just maybe the rest should actually go in to the pension.....May have to toss a coin or play rock, scissors and stone to decide.

Really would like an iPad though.....