Investing your inheritance: what should you do with it?

Investing an inheritance is a significant financial decision that requires careful consideration and planning.

While the initial situation and amount of money inherited may come as a surprise and arrive suddenly, it is important to keep a level head, strip out sentimentality, and focus on making the most of your new-found wealth. 

We reveal some general steps to guide you in the process.

Evaluate your financial situation and financial goals

Determine your short-term and long-term financial goals.

These goals may include buying a house, saving for retirement, paying off debts, or funding education.

Understanding your objectives will help you develop an appropriate investment strategy. 

Take stock of your current financial situation, including your income, expenses, debts, and existing investments.

Your age and life stage will also impact what is important to you. In your 30s, it may be the goal of home ownership or, in your 40s, supporting a growing family.

Your 50s may involve paying for university fees, driving lessons, and helping older children enter adulthood.

In your 60s and 70s, your goal may be to support your income needs or protect your wealth from inheritance tax. 

Create an emergency fund 

Before investing, set aside an emergency fund with three to six months' worth of living expenses.

This ensures you have a financial safety net in case of unexpected expenses or job loss.

To minimise the chances of needing to use your emergency fund, assess your risk tolerance, which is your ability to handle market fluctuations and potential investment losses – a financial adviser will be able to help.  

Pay off high-interest debts 

As previously suggested, your debts will likely be linked to your age and life stage and may include a student loan, mortgage, other home loans, credit card debt or other high-interest amounts. 

If you have any high-interest debts, consider using a portion of the inheritance to pay them off.

This can help improve your financial situation and reduce interest payments.

Interest on debt is often much higher than on savings or lower-risk investments.

It makes little sense to open an ISA, for example, and invest in a fund with a 4.5% return, while also having outstanding credit card debt with an interest rate four times higher. 

Establish an investment plan 

Having financial eggs in several baskets is a good idea if you’re new to investing or have a limited amount to invest.

If this is your first time, determine the right investment strategy based on your goals, risk tolerance, and life stage.

To spread the risk, consider diversifying your investments across different asset classes, such as stocks, bonds, property, and other investment funds. 

Educate yourself 

You’re taking the first step to investing inheritance money well by reading this guide.

Take the time to educate yourself about investment options, market trends, and investment strategies appropriate to your situation.

Understanding the basics of investing will empower you to make informed decisions and potentially achieve better results.

A financial adviser will consider your situation and discuss your goals, and your available options. 

Start investing gradually and remain patient 

There are several good reasons to take a gradual approach rather than diving in head-first, including sentimental reasons attached to inheriting money.

It’s difficult, but try not to be swayed by what you think the benefactor would have wanted.

Market conditions may have changed, and your situation may not match their wishes.  

So, rather than investing the entire inheritance at once, consider a gradual approach.

This technique involves investing a regular, fixed amount, regardless of market conditions and can help mitigate the impact of market volatility. 

Investing is a long-term endeavour, and it's important to remain patient and avoid making impulsive decisions based on short-term market fluctuations.

Stay focused on your goals and maintain a disciplined approach. 

Monitor and adjust your investments 

Unless you have chosen a financial adviser to manage your savings and investments, you must regularly review your investment portfolio and adjust as needed.

Market conditions and your financial goals may change over time, so it's essential to stay informed and adapt your inheritance investment options accordingly.  

Ensure you put specific dates in the diary to review your investment performance and adjust accordingly. 

Consider paying into an ISA

Investing inside an ISA can be a great way to protect your investments or cash from tax. 

Any gains made on shares held inside an ISA are exempt from capital gains tax (CGT). Read more here to find out more about how CGT works. 

Cash held inside an ISA or pension is also protected from tax on any interest. 

You can contribute up to £20,000 each tax year to an ISA. You can’t carry forward any unused allowance, so it’s important to make the most of your allowance each year.

Consider contributing more to your pension

Investing in your workplace pension or a private pension, such as a self-invested personal pension (SIPP), is also a great option for an inheritance. Like an ISA, investments made inside a pension are protected from CGT.

You’ll also receive tax relief on any pension contributions. Basic rate taxpayers receive a £20 boost for every £80 they contribute, whereas higher rate taxpayers receive £40 on top for a £60 contribution.

Pension contributions are capped at £60,000 in any tax year (known as the pension allowance), or your earnings, whichever is higher.

You can also carry forward any unused pension allowance from the previous three tax years, although you still can’t pay in more than you earn in the current tax year.

Watch out, because your workplace pension and any tax relief are also counted as part of your allowance. For example, if you earn £50,000 in the current tax year, you can pay £50,000 into a pension, including tax relief and employer contributions.

If you’re a higher earner, then you may be able to contribute up to £60,000 to your pension and £20,000 to your ISA in one tax year.

If you’re investing inside an ISA or pension, you’ll still need to decide how to invest. Some providers offer ready-made funds based on your risk profile or financial circumstances.

Seek expert investment and pension advice 

Arrange an initial meeting with a financial adviser who can provide personalised guidance based on your specific circumstances.

They can help you develop a suitable investment plan, select appropriate investments, and monitor your portfolio over time.

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