An inheritance may be a blessing, but it can also come with a lot of complexity and important decision making. If utilised wisely, an inheritance can assist in establishing a new profession, finishing education, purchasing a new home, planning for retirement, or saving for unforeseen eventualities. However, if inheritance is not properly handled, it does not endure as long as many people believe. As a result, to properly capitalise on the opportunity, you must understand how to manage it appropriately.
What should you do with an inheritance?
When you initially receive your inheritance, it may feel like you will have financial stability for the rest of your life. However, such bequests must be carefully handled for the advantages to last in the long run.
Stop, think, and plan
It is essential to avoid making hasty judgments while planning how you will use your inheritance. It is normal to be tempted to quit your work as soon as you inherit, or to utilise the money to buy your dream car. However, it is critical to take a step back, analyse, and make smart financial decisions.
Clear your debts
As much as you may be inclined to spend your windfall on a big-ticket item, the most prudent initial move is to clear your debts. Make an inventory of your financial status, including any debts, mortgages, and credit card bills, and make a plan to repay them.
Repayments should generally be prioritised in direct relation to the interest rate you are paying. Credit card payments, for example, are often more costly and have a considerably higher interest rate than mortgages. Consequently, pay off high interest credit card debt and personal loans first, before progressing on to lower interest rate liabilities.
Paying off debts with your inheritance may not feel like an exciting transaction, and it is tempting to believe that you will not feel the benefit of this. However, being debt-free can relieve you of financial stress, provide more freedom, and allow you to live more comfortably within your means.
In some cases, the commitment to pay off debts before investing should be made after comparing the interest rate and length of term on debts with the potential returns earned on investments. However, this is generally considered to be a higher risk approach to personal financial management, and we would advise anyone considering this to seek professional advice to ensure it is a suitable choice for their circumstances.
Save for the short, medium and long term.
Following the payment of any liabilities, the next natural step is to keep a portion of the inheritance as an emergency cash reserve, while investing the remainder for the long term. Instead of succumbing to the temptation of spending the entire inheritance on frivolities, it is strongly advised to save and invest in strategies that will provide the best balance between short, medium, and long-term goals.
For your rainy-day cash fund, you will want to make sure this element of your inheritance is accessible and as secure as possible. We generally recommend having an emergency fund of 3-6 months’ worth of living expenses to cover those unforeseen events, such as illness and loss of a job.
If this reserve amount is going to be substantially above £85,000, you may want to consider spreading your cash deposits across several financial institutions to ensure you are fully protected by the Financial Services Compensation Scheme (FSCS) beyond the £1 million protection offered on high balances for 6 months each year. This is because the FSCS will only pay up to £85,000 per person per institution in the worst-case scenario where a UK-authorised bank or building society collapses.
National Savings & Investments (NS&I) are worth considering as a safe place for significant quantities of cash. These are government run savings accounts 100% backed by HM Treasury, which means you do not need to worry about spreading your cash around here. The main products to look at are: Premium Bonds, Income Bonds, and the Direct Saver. These products are all easy access, with no notice and no penalty.
You may also want to put your inheritance to work for you in the long run. It can be invested in a variety of financial assets, such as shares, bonds, currency, commodities, or real property. Provided you are happy to put your capital at risk, these investments put you in a position to potentially earn greater returns in the future, such as price growth, dividends, interest payments, or rent. Diversification among assets, sectors, and countries can help to mitigate the risks.
Put some of it in your pension
A pension is an excellent vehicle for both long term investment returns and tax advantages. Contributions to a pension can provide income tax relief in accordance with your tax position, which is particularly powerful for higher rate taxpayers, and any investments within a pension can grow largely free of tax. Furthermore, 25% of the retirement fund can be withdrawn as a tax-free lump sum from age 55 (55-57 from April 2028), and the pension pot can be passed to future generations without incurring any inheritance tax consequences.
Donate a portion to charity
Many individuals think about contributing a proportion of their inheritance to charity as well. Transferring a legacy obtained from a close relative to a good cause can be rewarding. The inheritance is therefore not only a gift to you but a way to assist others.
Keep some for your own pleasure
If you inherit a large quantity of money, you have every right to enjoy it on personal pleasures guilt-free. However, before rewarding yourself, it is important to first pay attention to your debts, savings, investments, and your future. After proper financial preparation, you should have no worries about spending any residual inheritance on holidays, luxury goods, house improvements, or anything else that brings you joy.
Professional advice
It is an intelligent option to obtain the help of professionals. An independent financial adviser should provide you with an unbiased evaluation of your financial status and will also offer you much needed support and guidance. A financial adviser can also help you choose the best ways to invest your inheritance based on your risk tolerance, age, short-term and long-term objectives, and present financial situation.
In conclusion, an inheritance, if handled properly, it may put an end to years of financial struggle and pave the way for years of financial stability. As a result, one should engage in careful financial preparation. An inheritance may be used to pay off debts, save and invest for the future, plan a happy retirement, establish a secure financial future for future generations, and improve your quality of life. When choosing what to do with your legacy, it is crucial to plan prudently and with due consideration.
Churchgates are able to provide personalised inheritance advice. You can get in contact with our team today using our online contact form.
