The Best Way To Invest An Inheritance and Protect Your Newfound Wealth
The Best Way To Invest An Inheritance and Protect Your Newfound Wealth
Charlotte Gifford Tue, April 25, 2023 The Telegraph
Receiving a lump sum inheritance can be life-changing. But when it comes to deciding what you should do with a sudden windfall it is easy to feel overwhelmed by the range of options at your fingertips.
Undoubtedly one of the worst things you could do – besides spending it all at once in a mad frenzy – is put the money in your current account. This will leave your inheritance at the mercy of inflation. If inflation is on average 2 per cent, then in terms of purchasing power a £100,000 lump sum would be worth just £50,000 in 25 years.
Taking a proactive approach to growing your inheritance is crucial. Here, Telegraph Money tells you what you need to know about investing to get the most out of your newfound wealth.
First Things First
Make sure you have a rainy day fund
This should be a sum of money to cover an unexpected expense. It is generally advised that you keep enough for three to six months’ expenditure.
However, this isn’t an excuse to leave thousands of pounds languishing in your current account. Put the money in a savings account paying a competitive rate.
Pay Off Your Debts
This includes overdrafts, credit cards and loans. The high interest rate on these debts will probably eat your wealth faster than the rate of your investment return will grow it.
Does this mean you should also pay off your mortgage or, if you have it, your student debt? That depends.
Emma Watson of the wealth manager Rathbones said clearing student debt can be a sensible thing to do, especially if your loan has a relatively high interest rate (like those taken out since 2012). Workers on "Plan 2" loans will be charged a maximum interest rate of 6.9 per cent. The debt is repaid at a rate of 9 per cent on everything over the earnings threshold of £27,295.
However, because the monthly repayments are based on your earnings, the cost is probably only worth it for very high earners. Bear in mind the debt is wiped after 30 years regardless.
With mortgage rates going up, Ms Watson said the argument for paying off your mortgage first is stronger than it has been in the past.
“However, the principle of look before you leap applies as, if your mortgage is on a fixed term, there may be penalties applying to free yourself from it,” she said.
Protect Yourself
Promises of sky-high returns are telltale signs of an investment scam. Only put your money with a provider regulated by the Financial Conduct Authority.
Be wary of saving more than £85,000 with one institution – only sums up to this limit are protected under the Financial Services Compensation Scheme, in the unlikely event the company goes bust.
Should I invest it all in one go or in smaller increments?
Another thing to consider is whether you should invest the sum all at once, or in dribs and drabs.
You may have heard that drip-feeding the cash into investments will help to avoid the impact of market peaks and troughs.
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