How to handle an Inheritance

Receiving and managing an inheritance at any point in time can be both a financial and emotional challenge. For many, receiving a windfall from their parents, grandparents or other loved ones comes with a mix of grief and financial responsibility. Navigating this change in finances requires careful consideration to ensure the money is used wisely.

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The Emotional Impact of Receiving an Inheritance

Inheriting wealth often follows from the loss of a loved one, which can complicate decision making. Grief can often cloud your judgement, leading you to make impulsive financial decisions. It is advisable to take your time before making any major decisions and it may be worthwhile seeking guidance from professionals.

What To Do With The Windfall

When the time is right, the first step is to evaluate your financial situation. This involves understanding your current debts, savings and long-term goals. Consulting with a financial adviser can help to provide you with clarity and understand how you can utilise your inheritance within your financial plan. 

However, it’s important to consider that while you are in a holding period and managing a substantial sum of money, it might be beneficial to temporarily place these funds in an easy access savings account.  The Financial Services Compensation Scheme (FSCS) protects larger sums following certain events such as house sales, redundancy payouts and an inheritance known as the temporary high balances. This protects up £1 million for six months should the worst happen.

In addition, you could place the inheritance money in a National Savings and Investment (NS&I) savings account. This option provides maximum security and competitive interest rates. Since NS&I products are backed by the government, you have full financial protection and do not need to worry about the Financial Services Compensation Scheme limit of £85,000 per person per product.

Potential Financial Options

What you should do first will depend on what form your inheritance takes, for example, cash, assets or property. Below are a couple of examples of what you could do with your inheritance:

Spending: 

Whilst it’s important to secure your financial future, it’s also valuable to enjoy a portion of your inheritance. Whether it’s a dream holiday destination, home renovations or purchasing a new car, these experiences can bring joy, especially during challenging times.

Saving: 

Keeping some of the inheritance in a high interest savings account or as an emergency fund is a relatively safe option. This will ensure you have accessible funds and provide you with financial security in the case of unexpected expenses.

Investing: 

Depending upon your risk tolerance and financial goals, investing a portion of the inheritance can offer long-term growth potential. Diversifying investments across different asset classes such as equities and bonds can help mitigate the risk whilst potentially increasing your wealth over time. Ensuring you are invested in tax-efficient vehicles and making use of your available allowances. For example, Individual Savings Accounts (ISAs) can shelter your wealth from income and capital gains tax, and every tax year adults over the age of 18 have an ISA allowance, currently £20,000.

Pensions: 

Increasing your pension fund can be a highly tax efficient option, especially if retirement is on the horizon. Additional contributions can enhance your retirement lifestyle and provide peace of mind in retirement. By making a personal contribution to your pension you can benefit from tax relief (subject to individual circumstances), and this can be advantageous if you are a higher or additional rate taxpayer. Also, pensions are outside of your estate for inheritance tax purposes, so you can protect your inheritance that you receive and pass onto future generations.

Charity: 

Some people also consider donating a portion of their inheritance money to charity. Inheriting wealth has the potential to increase your own inheritance tax liability. To help overcome this, you could gift a portion of your estate to charity, in your will, and you could benefit from a lower inheritance tax rate of 36% (subject to gifting at least 10% of your net estate to charity), which is lower than the current 40% tax rate. 

Balancing Personal Needs and Financial Goals

A key challenge is balancing immediate luxury expenses with long-term financial security. It is important to avoid impulsive spending and to focus on how the inheritance you have received can support your financial objectives. Paying off a mortgage may take priority over luxury spending, as can the costs of educating children or enhancing your retirement fund.

The Importance of Financial Planning

A comprehensive financial plan can help you navigate the complexities of managing an inheritance. This overall plan should include:

Short Term Goals: consideration to paying off high-interest debts, securing an emergency fund for immediate income needs or unexpected expenditures.

Medium Term Goals: investing for the medium term for the next 5 years or more. For example, say you have plans to purchase a new car or even a holiday home in 5 years’ time but do not need this money in the near term, you could consider investing this portion of the wealth. However, it's advisable to discuss this and your attitude to investment risk with a professional.

Long Term Goals: planning for retirement or leaving a legacy for your loved ones. For example, money that is not needed for 10 or more years could be invested in your pensions to bolster your retirement fund and provide you with peace of mind for when this time comes.

Inheriting wealth can be challenging to deal with, particularly when you are also grieving the loss of a loved one. Engaging with a financial adviser can help you to plan and manage your finances that align with your goals. With their guidance, you can develop a strategic financial plan that integrates both your current assets and inheritance. Together, you define your short, medium and long-term objectives, ensuring your wealth is invested in tax efficient vehicles and is allocated appropriately to meet your different goals and time horizons.

If you’d like to learn more and discuss your own personal situation why not get in touch and speak to one of our experts today to see how we can best support you.

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The details in this article are for information only and do not constitute individual advice.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

Investment returns are not guaranteed, and you may get back less than you originally invested. 

The information provided in this article is based on our understanding of the current allowances and legislation and is subject to change.