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Could you be squandering your inheritance with caution?

We take a closer look at why playing it safe with inheritance could be a costly mistake.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

When it comes to managing inherited money left behind by loved ones, there’s plenty of emotion at stake. Whether it’s newly inherited money or you’ve had it for a while, you’ll likely feel the pressure to do the right thing with the legacy.

This could in part explain why almost half of people who have received, or are expecting, an inheritance plan to leave at least some of it in a current or savings account*.

There might be a perfectly good reason for this approach. Perhaps you’re struggling to come to terms with your loss and aren’t in the right headspace to make big financial decisions. In this case, temporarily putting your money in a savings account earning a competitive rate of interest could be a smart move.

Alternatively, you could have a specific plan for it, things like home improvements or paying off the mortgage. Cash savings, in our view, is the best home for any planned spending in the next five years.

Should I save or invest?

But if you fall into the ‘worried about doing the wrong thing’ camp, you could end up squandering any inheritance by being too cautious. Inflation (the increase in prices for goods and services) could erode the spending power of your money over time if the interest rates you receive on your cash savings don’t keep up.

Here we’ll look at some of the options for inheritance, but it isn’t personal advice. If you’re not sure what’s right for your circumstances, please ask for financial advice.

Paying off debt

Maybe it’s not the most exciting option, but it’s an important one.

Using any inheritance to pay off outstanding debt, like credit cards or overdrafts, could reduce the amount of interest you pay and help put money back in your pocket over time. Not to mention the wellbeing benefits you get from not having any unwanted debt hanging over you.

Always check the terms and conditions from your lender though. Some will charge early repayment fees which might cancel out the saving you’d make in interest. If you plan to pay off any larger debts such as your mortgage for example, we’d recommend speaking to a mortgage adviser before taking any action.

More on controlling debt

Savings accounts

Depending on your risk appetite, goals and time horizon, you might feel more comfortable keeping any inheritance safely tucked away in a savings account. Unlike investments, which can go up and down in value, cash savings carry less risk.

But here’s the catch. Cash isn’t totally risk free.

With inflation on the rise, currently 2.0% in the UK (Consumer Prices Index), it’s more important than ever to make your money work harder. Yet, thanks to record-low interest rates, savings accounts aren’t currently offering any inflation-beating rates. This means your money will be worth less in real terms over time – what £10 can buy you at today’s prices, will buy you less in the future.

The highest rates are available when you save for a fixed term. Typically, the longer the term, the higher the rate of interest. But that means you won’t be able to access your money until the fixed term is up. Easy access savings accounts allow savers to get access to their cash at any time, but these tend to have lower rates.

Although the current interest rates you receive on cash might not beat inflation, it’s important to find the best rates to help reduce its overall impact.

Find out how your cash might grow with our savings calculator

Investing in the stock market

Investing carries more risks than cash savings. Risk is what’s needed to make more of your money and there are plenty of ways to manage it.

Diversifying is one option. It’s all about not putting all your eggs in one basket and is often seen as an essential for any investor. Spreading your money across a number of different investment types, geographies and sectors should mean you always have something performing well. It also reduces the overall impact of one area performing particularly poorly.

Investing for the long term is another way to keep risk under control – that’s at least five years, but ideally a lot longer. History tells us the longer you’re invested, the better chance you have at investing success. Longer time horizons means your investments have more time to recover after market drops.

Let’s take the financial crisis in 2008 as an example. The UK stock market lost almost 50% of its value during the crash, but recovered to pre-crisis levels roughly three years later. It’s a lesson for investors to always keep time on their side.

Remember though, past performance isn’t a guide to the future and unlike the security of cash, all investments can fall as well as rise in value so you could get back less than you invest.

Learn more about investing


If you’re planning to use your inheritance to support later life, your pension could be a suitable home for it. Even if you’re approaching retirement, or perhaps you’ve already stopped working, it’s never too late to pay into your pension.

Your pension is there to support you with an income once you’ve stopped working, so you’ll need to think carefully about how and where you invest. As a rule of thumb, the closer you are to retirement, the less risk you should take on as your investment time horizon is shorter.

Retirement is personal though. When you want to retire, the lifestyle you want to lead in retirement and what you’d like to leave behind as your legacy are other factors to consider when saving into a pension.

Before paying into a pension, you should check how much you’ve contributed for the current tax year. You can benefit from tax relief on personal pension contributions up to your total earnings, normally capped at £40,000 per year. If your inheritance is more than this figure, you might have to drip feed it into your pension over several tax years.

Just remember, once money is paid into a pension you won’t usually be able to access it again until you’re at least 55 (57 from 2028). Pension and tax rules can change and benefits depend on your circumstances.

More on pension contributions

Getting help with your inheritance

We’ve covered some good options for what to consider with your inheritance. But in many cases, a mixture of the above options will be needed at some stage and knowing where to start can be tricky.

If you need an extra helping hand, our financial advice service can help.

Our advisers will always look at your circumstances and plans as a whole before providing their recommendations. They'll find out about your circumstances and discuss your choice of service to make sure it’s right for your risk appetite and objectives.

We can:

  • Recommend a suitable investment portfolio for your goals
  • Check your portfolio is cost effective
  • Make sure your portfolio is well balanced and diversified
  • Make your portfolio suitable for your stage in life

More on financial advice

*Figures from a survey by Opinium for HL in April 2021, 673 responses.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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