How can you make the most of an inheritance? For many people receiving an inheritance can be a little daunting. You may be aware of how hard your relatives worked to earn that money and feel pressure to ‘do the right thing’ with it. You may also see it as an opportunity to secure your financial future, but be unsure about the best way to look after it and help it grow.
In this article, we will explore some options for the types of assets you could invest in and explore whether ISAs or pensions are preferable. We will also touch on the benefits of knowing you have invested your inheritance in the right way.
Disclaimer
Without knowing a lot about your personal situation, aims and attitude to risk, it isn’t possible to offer financial advice. So while this article can help you begin to think about what to do with your inheritance, it shouldn’t be taken as financial advice.
How to make the most of your inheritance – which asset to invest in?
Maybe you have an idea of how you should invest your inheritance? Lots of people rely on their intuition when it comes to investing. The problem with this is that in general, we are blissfully unaware of any gaps in our knowledge.
Some of the biggest mistakes you can make in relation to your finances come from being unaware of what you don’t know.
There may be investment options out there that would fit your circumstances and aims perfectly, but if you’ve never heard of them, you are highly unlikely to choose them. Similarly, it’s tempting to copy what someone else has done, especially if they have had success with their investments, but their circumstances were likely different to yours. Make sure you learn about all the available options before making a decision.
Here are some of the main options available to you, we’ll cover each of these:
- Keep your inheritance in cash
- Invest it in property
- Invest it in a diversified portfolio of assets like shares and bonds
Keeping your inheritance in a high interest deposit account
You might be tempted to keep the inheritance “safe” in a bank account. It’s understandable that you wouldn’t want to take big risks with this money. The emotional side of receiving an inheritance can make it tempting to play it safe.
The problem is, keeping money in cash isn’t a safe move over the long term. In the long term, inflation means that the price of goods and services will increase more quickly than the funds held in your savings account will. History tells us that keeping your money in cash over the long term pretty much guarantees you will lose out to inflation.
While a 4 or 5% return on savings might sound attractive in 2024, keeping money in cash means you won’t be able to buy as much with it in a few years as you can today.
Investing your inheritance in property
Property does provide protection against inflation over the long term – property prices continue to rise in general because there is a limited supply in the UK. It can also provide an income if you choose to rent it out. And you can borrow against the value of the property, which you can’t do with some other types of investments.
There are some downsides of investing in property though.
You only own one asset. This is also known as a lack of diversification or put simply: keeping all your eggs in one basket. It’s possible to insure your property, but you still only own one asset, whereas with other kinds of investments it is possible to own thousands of assets. Keeping your eggs in lots of different baskets is a good idea, particularly if you have big plans for your eggs.
The current UK tax rules are also a downside of investing in property. In recent years owning a second property in particular has been made much more expensive by changes to the tax rules. Additional stamp duty on second homes, capital gains tax on second properties and higher tax rates on rental income have all reduced the attractiveness of property as an investment.
It’s also worth remembering that there are risks involved when you become a landlord: non-paying tenants, empty periods between tenancies, ongoing maintenance costs, not to mention the time and work involved. Managing a property can be like taking on a second job.
As an asset, property is not easy to turn back into readily spendable cash. It can be hard and expensive to cash in part of your investment. It can also take a long time to get the money into your bank account if you need it in a hurry.
These downsides don’t mean you should never invest your inheritance in property. But they are a reminder that it is worth exploring all of the options before making an informed decision.
Investing your inheritance in the stock market
How did you feel when you heard the term “stock market”? Did it bring to mind a scene with men shouting on a trading floor? Did it immediately conjure up images of plunging graphs and big losses in stock market crashes? If it did, then here are some facts that might help.
Fact 1:
Bad news sells – newspapers only report stock market falls. “Stock market steadily increased in value over the last 20 years” isn’t a headline that grabs you.
Fact 2:
The stock market goes up approximately 75% of the time.
Fact 3:
The stock market is associated with risk taking. But it’s just a marketplace where you can buy and sell tiny slivers of the companies we all buy from on a daily basis.
Fact 4:
You are probably already a stock market investor via your workplace pension.
By investing in small shares of companies you own a small piece of the company’s profits, assets and knowhow. This means as the employees of the company create more value, you own a share of that increase. In the long term this is likely to provide a return above inflation.
The advantages of investing your inheritance in the stock market are that it provides an income. In the long term your investments are likely to increase in value at a faster rate than inflation. It is also easy to cash in part of an investment portfolio when you need to turn it into cash. You can also protect your investments against tax by placing them inside ISAs or pensions.
It is also relatively easy to create a well diversified portfolio of investments using the stock market. You can reduce your risk by holding different types of assets in your portfolio – for example shares, bonds, commercial property.
The disadvantage of investing in shares is that you have to be prepared for your assets to fluctuate in value. This can be hard particularly if you want to be a good custodian of your inheritance. Investing is a long term play, but by taking appropriate levels of risk, you can position yourself to make the most of your inheritance.
How to make the most of your inheritance – pension or ISA?
Your choice here depends on your personal circumstances. Your age, how much you earn, the amount of savings you have and what you want to achieve are all highly relevant to the decision about whether to invest into a pension or an ISA.
Here are the main advantages and disadvantages of these choices of tax advantaged savings accounts:
Pensions – advantages
Contributions to pensions get a bonus added to them by the government. If you are a higher or additional rate taxpayer you may also be entitled to an additional tax refund after contributing to your pension.
Investments held within pensions grow free from income tax and are not subject to capital gains tax. Pension assets also sit outside of your estate for inheritance tax purposes.
Using your inheritance to boost your pension is a tax efficient way to make the most of an inheritance.
Pensions – disadvantages
Pension funds are not accessible until the age of 57. WIthdrawals from pensions may also be subject to income tax.
So while paying an inheritance into your pension is tax efficient, it means you won’t be able to use the money to pay for that big holiday until you can access your pension.
ISAs – advantages
Holding investments within an ISA means those investments will grow free of income tax and capital gains tax. It is possible to withdraw funds from an ISA at any time without penalty,
ISAs – disadvantages
There are no significant disadvantages to ISAs except that they might not be as beneficial for you as pensions. It is worth comparing the two by knowing how long you are likely to be investing for and what your eventual aim for each investment pot is likely to be. Ignoring the possibility of pensions when you are saving for your future can be an expensive mistake.
It is worth taking care to use the right tax wrapper when deciding how to invest your inheritance.
Using your inheritance to make your life better
Maybe because the source of the money comes tinged with some feelings of sadness and a feeling of responsibility, it is possible to forget the benefits that financial resources can bring us. But, it’s not controversial to say that money and the financial security it can bring will make your life better.
Without knowing who you inherited money from, it’s hard to say what they would have wanted you to do. Perhaps you have some ideas about that. But don’t feel like you “should” have to do anything in particular. It’s your money now, after all.
If I left money to my children, I would like them to use it to achieve three main aims:
- Build financial security and resilience
- Invest for their future
- Use the money to get valuable experiences
These all sound like good ways to invest an inheritance. How you find a balance between these aims is up to you.
How Women’s Wealth can help
These are the things we love to help clients with here at Women’s Wealth. Helping women to be savvy with their financial resources and also mindful of how to get the most out of their money is why we are here.
If you have recently suffered a bereavement and would like to learn more about the practical steps involved, then you might find this Women’s Wealth guide to bereavement helpful.
If you would like to explore how we could help you to invest an inheritance in the best way possible for you, you can book a time to talk to me here.