What to do with your inheritance

Looking to make the most of your inheritance money? Wealth Manager Tom shares his tips on how to reduce inheritance tax, pay off your debts, invest wisely, maximise your pension pot, and save for your future.

You’ve come into some money – great!

Your immediate reaction might well be: “Fantastic – I now have lifelong financial security”. It can help you retrain for a new job, get a new qualification, purchase a house, make provision for your retirement… or simply build up your financial resilience.

Sound planning is what will earn you the outcome that you want and ensure that the benefits are long-term ones. But failure to manage it effectively will result in not lasting long as you might be hoping it will.

Before you do anything… clear your debt

The cost of borrowing is finally on the way up again. So the most sensible first step when it comes to inheritance planning will surely be to pay off any high-interest debt that you have. It's a good idea to check in with us and take stock of your finances. Given the changes afoot, continuing to service debt might no longer be sensible.

You should clear high-interest-rate debt first. Credit cards, for example, come with eye-watering high-interest rates – in the region of 22%. And usually, the higher the balance, the more interest you will end up paying. And it's compounded, meaning that you pay interest on the interest. Then there is the rapidly growing post-payment sector, which includes players such as Klarna. This sector has been criticised for encouraging consumers to get themselves into unserviceable levels of debt, and their products and services represent easy, low-hanging fruit that you should address as a matter of priority. So first pay off credit card bills, personal loans and any online storefront debt. Then tackle low-interest rate debt, such as your mortgage (obviously your interest rate will depend on your current mortgage agreement).

Already, you’ll be sparing yourself heavy monthly interest payments and will be in a position to better manage your finances. Typical easy-access savings accounts are still only offering maximum rates of around 3.5%. So, it is probably simpler to pay off debt… rather than to save, after comparing the interest rates on loans and the interest earned on savings accounts and deciding accordingly.

Build up your financial resilience

The next logical step should involve saving part of what you have inherited and investing the rest for the future. We can help you invest and grow your money.

A significant chunk of your inheritance can be used to build up a nest egg for yourself. An efficient way of doing this is in an ISA. Remember that you can invest up to £20,000 each tax year, and ISAs are not subject to income and capital gains tax. These savings can be in the form of a cash ISA, stocks and shares ISA, or a mixture of different types of ISAs.

You can also invest it for longer-term gains. We can help you articulate what you are investing for… what sort of goals, objectives and time horizons you are thinking about. And we can talk to you about various financial instruments and which ones are most appropriate for you. A solid investment strategy will ensure that you are able to receive steady returns in the future – in the form of dividends or interest payments… or even rent, for example. We can have a conversation with you about your appetite for risk and about how you can reduce your exposure through diversification.

Your pension is your ultimate investment instrument

In fact, the reforms introduced with the last budget make your pension even more ideal for returns and tax benefits. The removal of the Lifetime Allowance is a welcome benefit, as well as the increase in the Annual Allowance. Any inheritance invested into a pension can help fund your retirement. Remember, you can withdraw 25% as a tax-free lump sum.

Another benefit is that any inheritance invested in a pension is not subject to inheritance taxes, so it can be passed on to heirs and beneficiaries without losing any of its tax implications. Overall, putting your inheritance money into a retirement account is an efficient way to save it, grow it and keep it safe from the taxman.

Give some of it away

As a B Corp, Investment Quorum is very mindful of the responsibilities it has to the communities in which it operates. And we know that many of our clients are similarly committed to supporting causes that are close to their hearts. Donating money to charity is a good way to pass on the benefits of inheritance received from somebody else… to those who might need it more than you do. That way, your inheritance is more than just a gift to you: it is a means for others to benefit.

Keep some for yourself

Do not forget that you are perfectly entitled to spend some of your inheritance on yourself… right here, right now. But do address liabilities, credit card debt and your future needs before treating yourself in the present.

Then – after careful consideration and financial planning – you might consider an expensive holiday or some home renovations.

We are here to help

Inheriting money can actually be quite overwhelming. But it can also be hugely liberating. One of the key challenges is to avoid squandering it as soon as it is received – many people live to regret doing exactly that. That is where meticulous financial planning comes in.

As independent financial advisers, we can give you an unbiased opinion about your finances and provide you with the advice and guidance you need. And we aren’t just happy to talk to you… we are happy to talk to your whole family – including your children or even your grandchildren. After all, it’s never too early to become financially literate.

We can also help you determine the right investment strategy based on your risk tolerance, age, short-term and long-term obligations and your ultimate financial goals.

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