I have £40k. Should I go for peerto-peer?
A£40,000 inheritance is a significant sum to most people. However, it could soon be nibbled away if you earn a low salary and have high living costs. Olivia Hansell, 21, received her inheritance only a few weeks ago after her grandparents died earlier this year. She has no specific financial goals at the moment but wants the £40,000 to grow over five years. Around £37,000 is in a Santander 123 account, which at present pays 3pc on balances up to £20,000.
Since receiving the money Ms Hansell has applied to open a number of other high-interest savings accounts. However, this has affected her credit rating and she has recently been turned down for accounts at Tesco and RBS.
Savings accounts are where she wants to put the bulk of her inheritance but she is also interested in other, more risky ventures such as peer-to-peer because it offers “higher returns more quickly”.
Ms Hansell, a recent graduate in politics, philosophy and economics, earns £16,000 as a start-up business consultant.
Her one-year contract will end next June and by then she hopes to have been offered a better-paying job. She thinks a £24,000 salary is achievable. If not, she plans to travel and work abroad.
She pays £725 a month to rent a studio flat in Brighton, which she knows is not sustainable on her salary. She has yet to feel the full impact as her mother paid the first six months’ rent in advance. From November Ms Hansell will have to pay the rent herself. She has no debts other than a £500 overdraft. unsuitable for those who want security, who should usually focus on FSCS-protected cash savings.
If Ms Hansell is prepared to take more risk, she could consider peer-topeer, but only for a small proportion of her money. I would prefer to use a “multi-asset” investment fund that spreads risks by investing in a range of assets such as shares, bonds, property and commodities.
Funds Ms Hansell could consider include Investec Cautious Managed, Schroder Multi Manager Diversity and JPM Multi Asset Income.
She should ideally be saving into a pension and should see what options her employer offers. The earlier she starts the easier it will be to build up a decent retirement fund. However, I wouldn’t tie up any of her inheritance in a pension at this stage; she can always make contributions in future.
This young reader wants advice on how to invest an inheritance. By Amelia Murray
As Ms Hansell’s current financial position is anything but stable, I would defer making any concrete plans for investment or locking away funds for anything longer than the short term.
I understand that she may not envisage needing access for a period of five years, but her situation could change radically in November, when her accommodation contract is up, and again in nine months’ time, when her employment contract ends.
Ms Hansell needs to retain maximum flexibility with her capital as it may be needed to supplement her income until she takes on more gainful employment.
The first thing she should do is sort out her accommodation until June next year. Her rent equates to more than 62pc of her take-home pay, and, taking into account other living costs, it is not feasible to remain there.
I would urge her to carry out an income and expenditure analysis, taking into account how much she spends each month on utilities, food, travel, entertainment etc, to work out how much she can actually afford on rent, and starting the
‘I would advise her to ensure the safety of her money via an FSCS-protected bank’
search on that basis. In a city such as Brighton I would imagine that there are opportunities to house-share to reduce her accommodation costs.
Because of the instability of her circumstances I would ordinarily recommend at least a year’s worth of income to be held in instantly accessible cash to cover living expenses in the event of an emergency.
However, as we’re uncertain what Ms Hansell’s expenses may be next year, I would be tempted to retain all of her money in cash. She could put half in instant-access accounts, £10,000 in a notice account and a further £10,000 in a fixed-term deposit account of one year at the most, in order to achieve better returns. She might also wish to consider investing some of her money in Premium Bonds, which offer taxfree returns, can be accessed at short notice and offer maximum protection.
Over the long term, having a multitude of accounts should not affect your credit score too much as long as they are kept in order with little access to credit. Opening accounts at the same time can have a short-term effect, however. Based on an amount of £40,000, three accounts should be enough to generate a competitive return.
Peer-to-peer lending can offer rates better than you’ll get from standard cash accounts, but this is due to the risks involved. An increased rate of, say, 1-2 percentage points will give you little extra benefit for the associated risk.
I would, instead, advise Ms Hansell to ensure the safety of her money through an FSCS-protected bank or building society account.
I foresee her position remaining in this fluid state for the next couple of years, at least until she has found herself a permanent job and her standard of living is financially achievable and sustainable.
At this point there may be scope to invest her funds for better returns, but not before then.
Olivia Hansell earns £ 16,000 a year but pays £725 a month to rent her flat