10 things to do when you inherit wealth

When you inherit wealth, it’s not easy to make decisions about what you should be doing with it. You’re already coping with the loss of a loved one and may be expected to make life-changing decisions.

Understanding the steps you should be taking can make it easier:

1. Take your time

If you’ve inherited wealth, it can be tempting to dive straight in with making plans and spending. But you should take time to step back. Giving yourself some space should mean you are in a better frame of mind to make important decisions.

Before you decide what you will do with the money, make sure you understand what you have inherited and the value of non-cash assets, such as property. It is also important to ensure the correct, if any, inheritance tax (IHT) has been paid and you have taken steps to retrospectively minimise this where possible. For some estates, IHT will take time to calculate.

2. Think about what you want

When you have access to a sum of money or assets, it is often the short-term changes you want to make that spring to mind first. Perhaps you would like to take a holiday or buy a car you have always wanted, but it is crucial to think about the long term too. What you do now will have an impact on what you can achieve with the money and whether it will grow over the years.

3. Weigh up paying off debts

If you have high-interest debts, it is often the best course of action to pay these off first, whether they are from credit cards or loans. It will help improve your cash flow immediately and put you in a more stable financial position.

It can be more challenging to decide what to do with low-interest debts, including your mortgage. Depending on how much you have inherited, the interest rate, length of time left and other factors, you may be better off investing for capital growth, as this could outweigh the interest you are paying.

4. Put aside money for an emergency fund

If you haven’t already, now is the time to start building up your emergency fund that will help you pay unexpected bills and obstacles life throws at you. As a general rule of thumb, you should have the equivalent of three months’ salary that you can dip into when needed at a minimum. It means should your situation change, such as if you were to lose your job or be unable to work due to illness, you don’t have to worry about immediately covering the essentials.

5. Speak to a financial adviser

With the basics taken care of, now is an excellent time to seek professional financial advice. We can help you map out where your inheritance will be best placed to maximise the gift your loved one has left behind.

By taking your personal circumstances and aspirations into consideration, we will be able to offer tailored advice. After speaking with a professional you will be in a better position to understand how the inheritance affects your plans in the short, medium and long term. You can contact the Novus team to take the first step.

6. Look at saving vehicles to maximise tax efficiency

You will no doubt want to put some of your inheritance away to use later. To maximise the money you’re saving, you should be taking advantage of any tax efficient savings strategies.

Individual Savings Accounts (ISAs) are one of the most commonly used ways to save. Each tax year you can save up to £20,000 in a tax-efficient way. There are several different types of ISA to consider:

  • Cash ISA: With a Cash ISA, you’ll benefit from your account incurring interest at either a fixed or variable rate, depending on the terms of your account.
  • Stocks and Shares ISA: As the name suggests, this is where your money will be invested in stocks and shares. They can offer a better rate of return than a Cash ISA, but you will also need to consider that your money will be exposed to investment risk. As a result, you may be left with less money than you put in.
  • Lifetime ISA: A Lifetime ISA (LISA) is designed for saving for a house deposit or retirement. A maximum of £4,000 can be saved in a LISA each year and you’ll benefit from a 25% government bonus. You can choose from both a Cash LISA and a Stocks and Shares LISA. To open a LISA, you must be aged between 18 and 40, although you can continue to make contributions until you’re 50. Penalties for withdrawals will apply if you access before aged 60, unless this is for purchasing your first property.

7. Look at different investment vehicles

It can be tempting to avoid risk altogether and leave your inheritance as cash in the bank. However, your wealth is likely to decrease in value in real terms, thanks to inflation, with this strategy. As a result, you should consider looking at ways you can invest your money to steadily grow the amount you have.

The first step to take here is to consider the level of risk you are willing to take; higher risk investments have the potential to deliver larger returns but there’s also a higher risk that the value of your investments will fall. Our financial advisers can help to create a portfolio that matches your appetite for risk and long-term goals.

8. Invest in a pension

Depending on where you are in your career, retirement can seem like a long way off. But investing in a pension still has a lot of benefits.

Pensions are a way to invest in your long-term financial security. You will also benefit from tax relief, and they can be used to pass on wealth without increasing your IHT bill. In the past, saving into a pension may have left you with few options but Pension Freedoms now mean that they are a far more flexible savings vehicle.

Normally, you cannot access your pension until you are 55. Your money will be exposed to investment risk and the value can go down or up.

9. Save for the next generation

With your long-term wealth considered, you may want to start thinking about how you can provide financial security for the next generation, whether supporting grown-up children or you want to start a nest egg for grandchildren for university.

The best option for you and your loved ones will need to consider several factors. For example, adult loved ones struggling to get on the property ladder may benefit hugely from a gift that could be used as a deposit, while a Junior ISA can be a useful tool when you want to build savings that a child can access once they turn 18.

10. Update your own will

Now that you have your finances sorted and a plan for the future, it’s time to make sure that your own wealth will be distributed according to your wishes when you pass away. It’s not something that anyone wants to think about, but it can help your loved ones when you die. Hopefully, the inheritance you’ve received will improve your financial security for the rest of your life, making a will is one of the first steps to take when you want to do the same for your family and friends.

If you’ve inherited wealth and would like to better understand where your finances are now, as well as in the medium or long term, please contact us today.

Please note: The Financial Conduct Authority (FCA) does not regulate estate and inheritance tax planning.

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