Investing
Received a windfall? Inheritance from an investment perspective
There is no harm in treating an inheritance as a bonus – to buy a car, or to fund a dream holiday – but it can be a means to build up some financial security that allows greater freedom.
Ultimately, a dream holiday is nice while it lasts, but the effects of financial freedom are more enduring. How might you invest an inheritance to achieve this?
What is it for?
An inheritance usually arrives as a lump sum and it is usually more money than people are used to handling all in one go. The first and most important decision is: What is it for? It may have landed in your hands, but was it designed to be a fund for your children’s future? Or would you rather use it to fund an early retirement, change of career, or a place in the sun? The answers to all these questions will inform your investment decisions. They will help you establish how long you are investing for and how much risk you can take.
If you can invest for five years or more, or are happy to see the value of your capital fluctuate, you should think about stock market investment. Returns have historically been stronger, income is higher and it offers more protection against inflation. Equity income funds (such as those found in the IMA’s global equity income or UK equity income sectors) are a good place to start.
Do you need an income?
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A lump sum investment used wisely can deliver an income stream for life. If you invest through an Isa, this income stream can be tax-free. This can be used to fund school or university fees, or simply to fund a better lifestyle.
If you need an income, your main options are corporate bond or equity income funds. There are other options such as infrastructure – usually available via an investment trust (www.theaic.co.uk/aic/find-compare-investment-companies).
Lump sum or drip feed?
Deciding whether you are going to invest your inheritance all in one go or drip-feed it into the market is an important decision. If you are investing in stock or bond markets, you run the risk that you are buying at the top of the market, when the assets are at their most expensive (of course, you may be buying at the bottom too, but it is often hard to judge). It may be less risky to put smaller amounts into the market progressively, so you buy in at a range of different prices.
Consult an adviser?
If the sums are very large (£100,000+), it may be worth consulting an adviser, who can give you a steer on how to invest and how to choose the right tax wrappers. See our feature here on how to choose a financial adviser – https://www.yourmoney.com/your-money/news/2362218/six-steps-to-choosing-the-right-financial-adviser
Ultimately, while a fast car can seem attractive, an inheritance invested prudently can create significant financial security. It may not be as exciting, but it may serve you better in the long term.