Navigating inherited wealth and owning it

It’s possible that we will inherit money multiple times in our lives. From divorce to family to the passing of a partner, it’s crucial to have a clear strategy in place.

Inheriting wealth can feel overwhelming, especially if you haven’t previously been actively involved with managing your money before inheriting. Learning about your options and understanding your personal situation can empower you to make informed, confident choices. Whether it’s navigating dividing pensions during a divorce, understanding the implications of Inheritance Tax (IHT) or simply planning for long-term financial stability.

While this article can help you make the most of your money, it isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice.

1. Divorce checklist: don’t forget the pension

Divorce can be both emotionally and financially challenging, making it crucial to account for all assets involved.

One area that’s often overlooked is the pension pot. In fact, a pension can be one of the largest assets in a marriage, sometimes even more valuable than the family home. During divorce proceedings, it’s crucial to assess how pension assets will be divided. Failing to address pensions properly during a divorce could lead to missed financial security down the road.

While pensions are now discussed in nearly twice as many divorces compared to a decade ago, a concerning 60% of divorced women still say they aren’t discussing them during divorce proceedings. This lack of discussion often comes from misunderstanding; over a quarter of women believed pension assets were not part of the divorce process, even though they can make up a big part of a couple’s wealth.

Failing to address pensions can have serious consequences, costing women an average of £77,000 by retirement. By comparison, divorced men are on track to retire with £234,000 in defined contribution pension pots, while women are left with just £80,000.

Ensuring pensions are part of the conversation can result in a fairer outcome, with each partner potentially retiring with £157,000 if pots were split equally. As the value of pensions grows with age, it becomes even more critical for couples divorcing later in life to address them, securing a more balanced financial future for both parties.

2. Planning for Inheritance Tax (IHT)

With the inheritance tax threshold frozen until 2028, careful planning is essential for those inheriting or passing on wealth.

Don’t forget, from April 2027 it is likely that pensions will be brought into the scope of inheritance tax, a change expected to impact around 8% of estates. This makes early planning essential to mitigate potential tax liabilities.

If you want to read more check out our article, 2024 Autumn Budget – what it means for pensions.

There are many rules to consider but the first step is to work out if you are going to be affected by IHT. If the value of your estate or the estate you’re set to inherit exceeds the threshold, you could be looking at a 40% tax rate on anything above the limit. The good news is that you won’t pay inheritance tax if you are under the nil rate band. Work out if you will be affected by IHT by using our calculator.

If you will be affected, fortunately, there are several ways to mitigate this whether through gifting, setting up trusts, or more complex estate planning strategies. A good place to start is reading our guide to inheritance tax. Remember, tax rules can change and benefits will depend on personal circumstances.

Start the conversation early to ensure inheritance isn’t swallowed by taxes. Remember, if you need support with your financial planning, you can always ask for paid advice.

3. Investment planning

When planning to receive inheritance, it's important to create a strategy that aligns with your personal financial goals, as the current setup may not be suitable for your individual plan or risk tolerance. Develop a plan that considers both short-term needs and long-term financial goals. Whether you inherit cash, property, or investments, it’s wise to develop an investment strategy.

Consider investing your money, rather than purely sticking it in savings. Investing is an option to explore for money you won’t need for at least five years. Investing has the potential to turbo-charge your wealth, boost your financial resilience and help you reach your goals. Investing in the stock market has typically produced superior returns compared to cash savings over the long term. Although it is important to remember that investing comes with risk. All investments fall as well as rise in value, so you could get back less than you invest.

By embracing proactive financial planning, open communication and a commitment to learning, inheriting wealth can become a transformative opportunity to shape your future.

Instead of being overwhelmed by the complexities, equip yourself with the tools and knowledge to make confident, informed decisions. After all, when it comes to financial independence, knowledge really is a girl’s best friend.