BLOG: How to invest a windfall

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Maike Currie, associate investment director at Fidelity Personal Investing, gives lucky recipients of a windfall tips on how to invest it.

“Many people may find themselves inheriting a cash lump sum or even an existing investment portfolio, with very little experience or knowledge of how to invest and manage this properly. Changes to the pension rules scheduled to be introduced in April 2015, also mean parents are now more likely to pass their pension wealth to their children.

“Often dubbed unexpected or reluctant investors, these individuals may find themselves struggling with the daunting tasks of how to invest wisely and/or draw an income from their windfall.

“While a lot is written about how to accumulate wealth, there is very little guidance on how you should take money from a portfolio. Both are equally important, but for the ‘reluctant investor’ inheriting an existing investment portfolio, the strategies employed to withdraw an income from this will be of particular importance.

“You don’t want your windfall to unnecessarily end up in the taxman’s coffers nor do you want to funnel it into expensive, high risk investments and crucially, you don’t want to draw down too much income from the capital you inherited, too quickly.”

Three things the ‘reluctant investor’ should consider:

1. Drawing on income
Determining what a sustainable rate of income drawdown looks like is fraught with difficulty. How do you accurately predict what stock markets will do in the future? How do you know how long you will live for or what other risks may dent your inherited investment portfolios’ value over time?

To draw income, without prematurely depleting your portfolio, think about when you will draw income, how much income you will draw and how you will draw your income. Drawing up a financial plan can help you find the right answers.

It is also important regularly to review the investment portfolio. If your investments are performing poorly, income withdrawals might have to be reduced or suspended for a period, to allow some time to recover lost capital.

2. The details matter: tax, investment costs and paperwork.

Most reluctant investors run the risk of wasting a lot of money while coming to grips with how best to manage their inheritance. Some of the biggest risks are poor tax planning and ignoring investment charges, which could see you lose a significant slice of your inherited money over time.

You may also face a host of other hurdles: unsure of the details of the inherited investment portfolio, where all the paperwork is held and the practicalities of transferring assets into your name.

3. Rebalance and get some guidance

The reluctant investor may often find themselves overlooking the most important investment decision of all – asset allocation.

Your investment goals and risk appetite may be very different to the portfolio’s original owner. It is important that you rebalance the portfolio to suit your circumstances and adjust the balance between the different asset classes, accordingly. This will incur costs and you may have to consider selling some investments and then reinvesting. It can be daunting to decide where to invest your unexpected windfall.

The challenges faced by Britain’s ‘reluctant investors’ underpin the importance of making sure your paperwork is in order. Forget the antiquated belief that money should not be talked about. Have open conversations with your family members and make sure you have a will in place. Don’t leave your nearest and dearest with a welcome inheritance but little other guidance and support on how to deal with this.”

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