It can be difficult to know what’s best to do with an inheritance, whether big or small. In the UK, there’s a huge amount of choice when it comes to saving and investing a lump sum, so we’ve come up with some guidelines that could help you feel more comfortable approaching the task. However, there is no replacement for personal financial advice, and this blog shouldn’t be considered as such.
Before you get started, it can help to think about the lump sum in proportional terms – perhaps as a pie, in need of dividing in the most appropriate way for your personal circumstances. Whatever works best for you to help visualise and break down a large figure.
1. Take stock of where your finances are today
When presented with an unexpected amount of cash, it’s human nature to start imagining how to spend it in our heads. We all have that mental list of needs and wants ticking over from day to day, many of which are suddenly made a lot more realistic and achievable with an influx of cash.
Try to take a step back and review your finances more critically first. It’s always best to start by considering any debt you have, beginning with any loans, credit cards or similar products that are costing you money in interest. If you’re being stung by interest, paying off some or all of this debt could have an immediate impact on your financial situation, giving you a little more breathing room.
If you’re buying a home on a mortgage, it may not be possible or sensible to pay off the whole balance. You could consider paying off some of the mortgage, if you feel the result would ease pressure on your household finances either by reducing your monthly payments or moving you significantly closer to paying the mortgage off altogether. Remember to check whether your mortgage provider will charge any early repayment charges, though.
Next, consider how you are positioned in case something unexpected happens and you need extra money urgently. For example, what would happen if you were to be made redundant, or you had to pay out for emergency repairs to your home?
We recommend that people work out how much their monthly outgoings are and hold at least three months’ worth of these outgoings in cash separate from any investments, for situations just like these. You could also look into income protection products, but in any case, it’s sensible to always have some cash to hand.
2. Look into your cash options
While the Bank of England base rate has risen recently, it appears that not all banks are passing the increase on through higher interest rates on cash savings. Inflation also means that your returns could be reduced in real terms. Despite this, cash ISAs and cash savings accounts will always offer a low-risk home for money.
Lately, some current accounts have been offering interest and other incentives that match and exceed some of the savings accounts out there.
So, take some time to think about what proportion of your existing cash and the inheritance money you’d like to keep in cash, and do some research into the places you could leave it. You might want to put some into a ‘fixed saver’ account for a set number of years so you can’t easily fritter it away, while another portion stays at your fingertips.
3. Work out whether investing’s right for you
Everyone has a different tolerance for risk. This means that, for some people, investing isn’t right, as they don’t want to take any risks whatsoever with their money – even if they could potentially earn higher returns over the long term. Others will be more comfortable making this trade-off. It’s a very personal decision.
Your approach to risk will naturally play a part in the way you manage your inheritance. The amount you choose to hold in cash will help to offset the risk associated with any money you choose to invest.
Once you’ve decided what to spend and what to save in cash, you can start to think about what you want the rest of the money to do for you – what it can really achieve over the long term if you put it to work.
There are many different ways you can choose to invest your money, and it’s worth doing your research. For example, you could look at investing in property, or consider putting your money into the stock market. A stocks and shares ISA is often the first port of call to access the markets, because it’s accessible and tax-efficient.
If you’re thinking about retirement – and with retirement, it’s always a good idea to start early – then a personal pension could be a good choice. Pensions benefit from tax relief, meaning the government effectively tops it up for you.
It’s also worth making sure you factor in the upfront and underlying costs of investing before you take the leap. Remember that costs will eat into whatever returns you might get, so it’s worth unearthing the full picture, especially when it comes to the cost of selling your investments or leaving a provider. We recommend people only invest if they plan to stay invested for three years or more, so it’s important to be happy with your decision.
Some resources you might find useful
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.
A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.