How to Effectively Manage an Inheritance
Deciding what to do with an inheritance may present some challenges. Yet there are options to effectively manage the money for yourself, or if you want to pass it on to the next generation.
How should you apportion your inheritance?
Any decisions should not be rushed. You should probably spend some time deliberating with your loved ones about how much you may need, and what you should do with an inheritance. For example, you might want to pay off your mortgage, renovate your home or put the money towards your own retirement plans.
To help you decide, it may be helpful to model for different scenarios and outcomes. For example, you could model for how extra funds can ensure your own retirement goals are likely to be met, and thus how much excess capital could then be available to pass on to others.
Consider if a deed of variation is appropriate
A deed of variation is a document that allows beneficiaries named in a will to redistribute some or all of the proceeds from an estate. It may be suitable to mitigate the effects of inheritance tax (IHT). For example, if a beneficiary has enough to live on already, they may choose to use a deed of variation so the estate’s proceeds skip a generation and remove the risks of IHT being paid twice.
There are some ground rules: recipients must be over 18 (or it can go into a trust for recipients under 18), each of the beneficiaries affected must agree to the changes and if the move is for inheritance or capital gains tax reasons, it must be enacted within two years of the death.
However, the ins and outs of a deed of variation may be complex, so you should seek advice from a legal professional.
Inheriting a pension
When someone dies any unspent money in their pension pot can be passed on to one or more beneficiaries. If they die before age 75 you don’t have to pay any tax on pension savings left to you. If they are older, while you don’t have to pay inheritance tax, you will have to pay income tax on any withdrawals, so it may be worth assessing whether your inheritance can be kept as a pension.
Again, it is worth taking appropriate advice to ensure any pension inheritance you receive is efficiently and effectively managed.
A valuable checklist for a first-time investor
An inheritance may be the first time some recipients are faced with managing a large amount of cash. If that is the case and you want to invest the money, you should know that investment success is never guaranteed – even as an experienced investor. But you can take steps to avoid common pitfalls and increase your chances of getting a decent return.
Four factors you can control – fees, staying invested, being diversified, using tax wrappers – can make a substantial difference to your outcome over the long term. This article shows you how much you could miss out on if you ignore them.
You should also be wary of choosing what appears to be the path of least resistance: leaving a windfall in a bank account, thinking it is the safest option. This is a common misconception, and it should only be a temporary home, because over the long term the impact of inflation – even in a relatively benign environment – means that cash in a bank is far from the secure refuge you might think.
Inflation erodes the real value of your cash in the long run
Source: Netwealth & Bloomberg. The values represent £250,000 invested in 1 month Libor and an example Netwealth Risk Level 4 portfolio minus UK CPI.
Please note that past performance is not indicative of future performance.
Investing for the first time, or after a break, warrants careful consideration. It’s likely that whoever has passed on an inheritance to you has worked hard to generate and preserve their capital. The steps outlined here could help you to maintain that prudence and move with more confidence from cash to being invested.
Start a wider conversation about money
Whatever your situation, the importance of financial education – at any age – cannot be overstated. An inheritance may present the opportunity to talk to other family members about managing money, planning for the future and passing wealth on to the next generation. It may also give you more freedom to highlight the triumphs and mistakes you have experienced.
The Netwealth Network allows a family to come together and understand more about wealth, while offering a compelling way to make more of it. Each member of the network retains their investment independence, but benefits from the lower fees that are accorded to a group.
If you want to start a conversation about how we can help you with an inheritance, or have any other financial planning or investment queries, please get in touch.
Please note, the value of your investments can go down as well as up.