What to do with an inheritance: spend, save, invest or give?
Receiving an inheritance should be a blessing and change your life for the better, however, if you are not careful in your planning it could have a negative impact on your life. A legacy left by a loved one comes with a lot of emotional baggage and your relationship with the person you have inherited from often sets the tone for what you may do with it. Equally, a sudden deposit in your bank account can do strange things to people; you only need to look at the countless stories of lottery winners that have lost it all to know how badly things can go wrong.
This article contains some ideas of who is likely to receive an inheritance and how much, data on what other people in Great Britain do with an inheritance and ideas for what you can do with yours.
Who is most likely to receive an inheritance?
According to the most recent figures from the Office for National Statistics (the ONS), the largest inheritances are between spouses aged 55 years and older. Furthermore, people aged between 55 and 64 that already have a high income and wealth are those most likely to receive a large inheritance. Conversely, the least wealthy and the youngest typically receive the smallest inheritance on average although the amount received makes up a larger proportion of their existing net worth.
There is a clear link between the wealth of parents, the wealth of their children, the likelihood of inheriting and the amount inherited.
The chance of receiving an inheritance increases as you age, peaking at age 55-64, which ties in with life expectancy estimates and people inheriting from their parents. The resolution foundation estimates the most common age that today’s 20 to 35-year-olds will inherit is 61.
How much inheritance do people typically receive?
Over the period of the survey, just 4% of adults reported receiving an inheritance of more than £1,000 in the last two years and when they did, the median value was £11,000 (the median is the middle figure in the list of all the amounts received).
In terms of the source of inheritance, in those aged 16-34, 67% of those that received an inheritance in excess of £1,000 received it from a grandparent. Furthermore, the amount received in inheritance is likely to increase as the generation gap decreases. In other words, the amount inherited from a spouse is typically greater than the amount from a parent, which is often greater than the amount received from a grandparent.
The median value of inheritances of the value of £1,000 or more received in the last two years by source
The first thing to do if you inherit money is nothing.
Seeing your bank account balance balloon can make you do strange things and act impulsively. The first thing to do is to do nothing. You will need to spend some time planning what to do with every last penny of it or it could find ways of spending itself.
Perhaps consider parking the money in a savings account or even in premium bonds (up to £50k) so that it’s separate from your day to day finances whilst you make a plan and are ready to proceed.
Once you have had time to grieve and get over the shock of receiving an inheritance, you may want to cast your mind back to the person that left the legacy for you and the hard work that went into earning the money. The key takeaway here is to remain accountable to that person and to be intentional with what you do with it.
You could try imagining that you have to present a spending plan to the person that left the legacy and consider what their opinion would be with your choices.
What can you do with an inheritance?
Receiving a cash inheritance can be daunting. However, in reality, there are limited options for what you can do with the money. You could:
Enjoy the money and spend it on things and experiences to give you some great memories, but doesn’t build for your future.
Invest the money to improve your financial health over time.
Pay off any debts you may have, such as bank loans or credit cards, to improve your financial position and free up money from your normal income.
Use it as a house deposit or pay off your mortgage to accelerate your position on the property ladder. Don’t forget though that bigger houses cost more to run so your monthly expenses will likely increase.
Build up a solid emergency fund to be ready for any situation.
Pay for your education or build a University fund for your children, as often the very best investment is in yourself.
Give the money to charity or other good causes to help out those that are less fortunate.
How to make the most of an inheritance.
With our sensible hats on, we are unlikely to direct 100% of any inheritance to just a single category - it’s very likely to be a mix of several items from the list.
For example, with an inheritance of £100,000, you could go out and buy a used Ferrari and very likely run it for a couple of years. However, once the cash runs out the expensive servicing, repairs and insurance could put you in a worse position than when you started. So this approach is probably best avoided.
On the other hand, you could give 100% of the cash to a charity of your choice, which will likely do a lot of good but is probably best suited to those who are very financially secure. After all, the person that left the legacy to you could have given to a charity instead, so it’s likely that they wanted you to directly benefit from the money.
How to make a plan for allocating an inheritance.
The most important thing is to know where your priorities lie. For example, if you are crippled by debt payments each month, paying them off will make a huge difference and free up your income each month to build an emergency fund. Alternatively, if you’ve been saving hard for a house deposit, a cash inheritance could mean you can start looking for a place to call your own.
Understanding your net worth is going to be crucial. Once you know this, you can start to divide up the cake to suit your own personal circumstances. To start, just list out all seven potential categories and apportion a percentage against them.
|
TOTAL INHERITANCE |
£100,000 |
|
|
Category |
% |
Amount |
|
Enjoyment |
20 |
£20,000 |
|
Investment |
25 |
£25,000 |
|
Debts |
15 |
£15,000 |
|
House |
20 |
£20,000 |
|
Savings |
10 |
£10,000 |
|
Education |
5 |
£5,000 |
|
Giving |
5 |
£5,000 |
|
TOTAL |
100% |
£100,000 |
You can keep revisiting this list and revising your estimates until you’re happy with the way the numbers look. What’s more, working with percentages before the actual pounds and pence can help you be more considered and ultimately, more objective with your plans.
What do other people do with an inheritance?
In the ONS figures, there is a small variation in the decisions that different age groups take. However, across all ages, 49% save or invest at least some of the money and the older you are, the more likely you are to do this. Conversely, the younger you are, the more likely you are to spend some of the money. Interestingly, those aged between 35 to 54 were the most likely to use some of their inheritance to pay off debts. The group least likely to pay off debts was those aged 16 to 34.
How money received from inheritances of the value of £1,000 or more was used by age.
Using an inheritance as a house deposit.
In relation to using inherited money as a house deposit, a report by the Ministry of Housing, Communities and Local Government shows that between 2015 and 2016, 7% of first-time buyers used inherited money as a house deposit, which is an increase when compared to previous decades.
First-time buyers who used inheritance as a source for deposit. England, 1995 to 2016
What’s next?
If you have inherited a sum of money and are looking for advice on what to do with it or how you can invest for the future, you can get in touch with one of our advisors for independent financial advice. You can offer a free initial consultation and although we are based in Tunbridge Well, we advice clients across the UK. We can also offer advice on inheritance tax planning. You can also visit the Money Advice Service’s page on inheritance for more ideas.
Don’t forget, this article offers information about financial planning and investing and should not be taken as personal advice. Remember that investments can go up and down in value, so you could get back less than you put in.