The number of people receiving an inheritance, and the average value of the inheritance, is on the increase. According to This is Money, the average age in which people receive an inheritance is 61, while a study by IFS shows that the top 20% of high-earners receive the largest inheritances. About 10% of these inheritors received over £250,000.
Inheritances are life-changing amounts of money if handled well.
Coming into a large sum of money can be an emotional experience. Although there are obvious upsides to inheriting money and gaining a greater degree of financial stability, an inheritance is no compensation for losing a close relative. It’s common for people to have a hard time processing their newfound wealth and deciding how to use it.
Although it’s dangerous to plan for an inheritance to get you out of financial trouble, if possible, it’s a good idea to plan ahead. If you know someone is bequeathing a portion of their estate to you, it makes sense to know what you intend to do with it. You might feel guilty, like you’re being presumptuous and spending your loved one’s money before they die, but think of it like this: your relative is leaving you the money because they want you to have it. It follows that they would also like you use it effectively.
Thorough planning increases the chances you’ll put the inheritance to good use, and it also means that you won’t have to make difficult financial decisions while you are grieving.
Here are five actions to consider when thinking about the best way to use an inheritance.
1. Consult a financial advisor
The first thing to do is to seek out expert advice. If you don’t have any experience managing wealth, the drastic change in your life can be daunting. You’ll probably have lots of questions and very few answers. What are your options? Spend or invest? How do you make it go as far as possible?
Without expert advice, you run the risk of frittering away your inheritance, but financial advisors can help prevent this.
A good financial advisor will ask you questions about your personal affairs, your priorities, your lifestyle, and your plans. They’ll explain the various options available to you and will help you make decisions that make your inheritance work for you. This is likely to be what your relative hoped for when they left you your inheritance.
2. Fund your pension
Saving for your retirement might not be the most exciting or glamorous thing to do when you inherit money, but, glamorous or not, financing retirement is important. It’s also gotten harder in recent years. A worrying proportion of working-age people are not saving enough money to see them through later life, often because they simply can’t afford to. An inheritance can be a golden opportunity to look forward to a worry-free retirement.
You don’t need your financial planner’s advice about buying a new car or splurging on a luxury holiday, because a good financial planner will help you take the long view with your money. Navigating the complex web of private and personal pension plans is difficult, and that’s what a financial advisor is there for. A pension plan could deliver good returns and give you the benefit of tax breaks when you come to draw on it.
3. Start an investment portfolio
Putting your inheritance into a pension is a good plan. However, due to contribution limits, there may be some inheritance left over for other things. If you want to put your wealth to work and use it to generate more options, with greater freedom over when and how you can use your assets, general investments might be a better fit for you.
Your circumstances, financial affairs, and objectives will play a part in deciding whether investing is the right path for you. For example, maybe you’re close to retirement age when you inherit and already have a healthy pension fund. Maybe you would like to use some of the inheritance to create a portfolio to pass on to your children. A longer-term investment strategy like a trust would be one way to protect your wealth for your children.
4. Pay off your debts and mortgage
Clearing debts and paying off your mortgage is often one of the first people think about when they come into some money. These are obviously useful things to do, but they shouldn’t be done blindly.
Paying off a mortgage in one go may see the bulk of any wealth you inherit used up immediately, and there may be additional penalties to pay. A financial advisor might suggest you pay off higher-interest debts first.
If your objective is to gain financial independence and retire early, debts and mortgages are millstones around your neck, stopping you pursuing your dreams. You may be in a stronger position to finance pensions if you cast off these millstones first.
5. Put your inheritance in savings
The default option when inheriting a lump sum is putting it into a savings account. The savings interest you get from doing this is likely to be short of what you might get from investing or putting it into a pension, but you gain the benefit of easy access to your money.
This is the best option if you plan to do something like refurbish a house, fund a new business, or repay a debt. Your money might not work as hard, but it’s ready and accessible when you want it.
Another sensible option is to reserve some of your inheritance in a high street cash account. Whatever you do, though, take some time to make thorough, logical plans.
If you’re concerned about what to do with an inheritance, there’s no time like the present to get professional advice. Contact Capital today and one of our friendly team of experts would be delighted to talk through your options with you.