Just had a big Inheritance? Here’s what you could do with it
Receiving an inheritance is often a strange time, emotionally. On the one hand, there’s the thrill of a big windfall. On the other, is likely a sense of grief and guilt over how it arrived in your hands – because someone you cared about has recently died.
At Castlegate, our Lincolnshire-based independent financial advisers (IFA) specialise in helping people make smarter decisions with their money, savings and investments. One of the big challenges someone can face is deciding what is the best use of a large inheritance.
It can be tempting, for instance, to spend it all on a big holiday or a car. Others feel immensely guilty, and consider giving it all away. Whilst all of us deserve to treat ourselves and it’s certainly good to be charitable, it’s worth considering a broad range of ideas about how best to use this money.
In this article, our Lincoln IFAs will share some ideas with you about some of these other options, outlining some of the pros and cons as well. It’s important that you do not take this article as financial advice, as it is intended for information purposes only. Speak to a qualified independent financial adviser prior to making any major decisions about your inheritance.
#1 Consider Your Financial Plan
It’s not always the case, but usually this money did not just land on your lap, out of the blue. Normally the inheritance was expected at some point prior to its arrival, even if you did not necessarily know the exact amount it would be, or time or circumstances in which it arrives.
This means that you should hopefully have a financial plan already in place, which this inheritance money could potentially fit into. Whilst it might not automatically give you the answer concerning what you should do with the money, it at least narrows down your options.
For instance, is your primary financial goal to be mortgage-free within the next 5 years? If so, then receiving a large inheritance could go a long way to getting you there.
Others might not have that goal within their financial plan. For someone else, for instance, maybe the primary objective is to give a solid start to a pension plan. Again, some or even all of this money could really help towards this goal.
However, it’s important that when you first start out creating a financial plan, that you put any potential future inheritance in proper perspective. There have been cases, for instance, where people have expected a large inheritance, only to see very little or nothing down the line.
Any number of reasons can cause this to happen. One of the saddest and ugliest is family fallouts, breakdown and estrangements. You cannot be sure what will happen down the line, even if things are fine and wonderful now. Therefore, try and regard any future inheritances as a “bonus” when drawing up your financial plan.
#2 Pay off Debts
The interest on your debts can exceed the returns on your investments, therefore, it is prudent to consider clearing your debts. For instance, suppose you inherited £10,000. Should you put that money into savings, or should you use it to completely pay off your overdrafts and credit card bills?
The answer is almost certainly to do the latter. The total amount in monthly charges and interest payments from the latter is almost guaranteed to exceed interest rates from UK savings account these days.
Having said this, please carefully think about your position and consider speaking with an independent financial adviser prior to making a big decision. It isn’t always straightforward how, when or by how much, you should pay off certain debts.
A good example is your mortgage. You might want to use your inheritance money to make a big overpayment. If you commit all the capital in this way, however, then you cannot get it back if you later regret this decision. You also need to be careful that overpaying on your mortgage will not incur any nasty penalties or charges from your lender.
#3 Start / Add to an Emergency Fund
Many independent financial advisers and planners advise building up a “rainy day fund”, in case you or your family suddenly fall upon hard times. Our Lincoln IFAs recommend this as well, and it might be a good option for some of your inheritance money.
A general rule of thumb is to have at least 3-6 month’s worth of living costs in an easy-access bank account, in case you and/or your partner lose your job(s) or cannot work due to illness or an accident.
This is perhaps more urgent for people in certain lines of work or employment status, such as freelancers. Yet it’s still important for you and your family to put measures in place which will cushion everyone from hard times.
#4 Put it in a Pension
Remember, pensions offer a number of valuable tax reliefs. So if some of your inheritance was taken away by the taxman, putting it into a pension could be a good way to get some of it back.
A pension might not feel like the best use of an inheritance to many young people, but it could be a life-changing decision. Consider two scenarios, for instance.
Person A puts £10,000 from their inheritance into a pension at the age of 20. Person B puts £20,000 from theirs into a pension, at the age of 30. At the age of 55 (when they can both start accessing their pension), how much will their money have grown?
Assuming they both have an annual growth rate of 5%, Person A’s £10,000 will have grown into £57,337.18. Person B’s £20,000 will have grown into £34,812.90.
That’s the power of compound interest! So, consider putting some of your inheritance into a pension. Even if you are no longer in your 20s, it can still be a great option for you if the money is allowed to grow over the years.