“What Should I Do With An Inheritance I Have Just Received?”

A friend of mine received an inheritance the other day which was a substantial sum of money. Due to the source of money they wanted to use it appropriately but not knowing much about the world of investments they didn’t know where to start.  It is understandable that they didn’t want to fritter the inheritance away but investing it could have the same outcome if it was not done appropriately. This article is a summary of what I suggested. inheritance

First of all think about what you want to achieve with the money.

It may be that you want to use some of it to buy a permanent reminder of the loved one you lost. After that think about your goals and divide them into short term, medium term and long term. Capital intended for the short term should be left in cash (but look for the best savings rate you can get and review it regularly). For longer term goals you can afford to tie the money up and take some investment risk in order to get a (potentially) higher return.

The following list may act as a useful checklist which you should approach in an descending order of priorities:

- Do you have any debts you need to clear?  There is no point investing with loans outstanding.

- Do you have enough savings available to you to cover living expenses if you are out of work for a period of time? 3-6 months of expenditure available in an emergency fund is a common rule of thumb guide.

- Do you own a home currently? If not and you would like to, an inheritance would make a useful deposit. If you are looking to buy a house within 5 years keeping the money in savings where it won’t lose value would be sensible. If you have more than £85,000 you should spread it around a couple of banks so you have full compensation cover. If you do own a home you may wish to pay off or reduce your mortgage.

- Have you put enough away for your retirement? The sooner you start the more you will benefit in retirement. Current rules allow for a maximum of £50,000  (or 100% of salary if lower) to be contributed to a pension each tax year.

- Rather than, or in addition, to pension contributions, you should also consider ISA contributions. There are some distinct differences between ISAs and pensions. Whether you prioritise one over the other will depend upon your goals. Ideally you will do both.

- Do you want your children to go to private school and/or university? Investing some of this capital efficiently, perhaps in Junior ISAs, would be a good use for some of the capital.

- After going through the above list you may have some inheritance left.  You can invest in products such as investment trusts/OEICS/Unit Trust which provide the same investment options but are not tax advantaged; i.e. you will pay tax on income and capital gains.

- Do you want to make a charitable payment? You may wish to pass on some of your inheritance to those less fortunate than yourself. You many prioritise this over some other options listed above.

Dealing with an inheritance is an emotive issue but the donor would, more than likely, want to see it help your financial future. Having a proper plan and investing the money with a goal in mind can make sure this happens.

Once you have decided whether you have enough inheritance capital to invest in pensions, ISAs or the other investment options you will need to decide how much investment risk you wish to take. Your risk profile will have a bearing on the assets in which you invest.

If you would like to advice an inheritance click here.

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 Picture courtesy of James Beattie via Flickr.com

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2 Comments

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    Helen

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