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February 12, 2019
Should you save or invest your inheritance money?
Britons currently inherit £90bn a year from relatives and this amount is predicted to rise to £200bn by 2035, according to the Resolution Foundation (source: Financial Times). HSBC report that the average UK inheritance in 2017 was £119,088 (source: Telegraph).
7% of inheritance money is spent by those who benefit from receiving it by getting onto the housing ladder for the first time. This means that the Estate of Mum and Dad is just as influential a factor in fuelling property price increases as the Bank of Mum and Dad.
If you’ve recently inherited money, what should you do with it? The answer depends on how much you’ve actually inherited, your financial situation at the time, and your personal goals for the future
Three-quarters of Britons put money aside each month for their rainy day fund with nearly half doing so by using a regular savings account, according to MoneySupermarket.com (source: Moneywise).Depending on the size of your inheritance, you should perhaps try to think like a person accumulating savings who is getting ready to start their own business. Most business experts recommend that a new entrepreneur have between three and nine months’ living money saved so that they can cope with both day-to-day and unexpected expenses.
Perhaps the best answer though to this question is what would make you feel comfortable personally? When you have that figure, then you can start to build the rest of your inheritance plan around it.
Rainy-day funds should be held in the least risky form of interest-bearing accounts like those at your bank or building society or at National Savings & Investments.
Handling your debts
The more you pay your debts down, the less you have to pay in interest each month to service that debt.
If you have £10,000 worth of debt on credit cards at 18% APR, you’ll pay £1,800 a year in interest. If you have £10,000 worth of savings paying 1%, you’re earning £100. Using the £10,000 in savings to pay off the debt will mean that you spend £1,700 less per year.
If you can pay off your debts in full, do so. If not, pay down as much as you possibly can to reduce your monthly outgoings.
Open a business
Many people use inheritance money to start a business. Indeed, many entrepreneurs only get the opportunity to launch their own company as a result of inheriting cash.
Opening a business is fraught with risk and up-front expenses. Most businesses don’t show a profit until the second year and many don’t get to cash-flow breakeven (when the money made over the lifespan of a business covers the amount spent to date) until the third year. Many don’t make it at all to their third year of trading.
If you’re currently earning and you wish to spend some of your inheritance leaving the world of employment behind, the availability of ready cash in a rainy-day fund is more important than ever.
Once you have allocated money for rainy day fund, for debt servicing, and, if applicable, the launch of a new business, many financial experts would recommend that the rest be invested to protect the value of the remaining money or to provide a return on it.
All investments come with a level of risk and there are many important factors that you should consider before making a decision. More on that later.
Investing to generate an income
With the average inheritance in excess of £110,000, there are certain types of investment vehicles which allow you to both remain invested and to draw down a regular income from dividend payments. Your income is however likely to vary each year based on the size of dividends paid by companies in which you’re invested.
The first £2,000 of dividend income is free of tax. Dividend income above that level is charged at either 7.5% for basic rate taxpayers, 32.5% for higher-rate taxpayers, and 38.1% for additional rate taxpayers.
Invest and forget
One of the simplest ways to invest money is to choose ready-made portfolios which invest your money in certain types of shares, sectors, debt instruments (like government bonds), and other assets. Many of these investments can be wrapped into pensions and ISAs.
Higher returns can be made from riskier portfolios like those investing in emerging markets and stock market indices trackers. The riskier your portfolio, the more chance there is that you will not make back the money you invested in the first place. There’s a great article about investment risk here at Which
As with investing to generate an income, you should consider investment portfolios as long-term investments.
Pensions are the leading way to save for retirement in the UK and their popularity is primarily derived from the impressive tax savings they offer. In brief, with a pension, you can:
• invest up to £40,000 a year in your pension which qualifies for tax relief
• if you run a company, the company can make that investment on your behalf and offset it against corporation tax
• you can take out 25% of your pension pot with no tax to pay when you turn 55
• you can pass your pension fund onto your spouse, civil partner, children, or grandchildren free of Inheritance Tax
• you can choose an off-the-shelf (invest-and-forget-type) pension or build up your own investment portfolio.
The Government has produced an informative and engaging website on pensions which you can find here.
Buy-to-let property investment
For over 20 years, investing in buy-to-let property has been the main way for Britons seeking to accumulate asset-based wealth for themselves and their families. There are over 2 million of us who own property in addition to the house or flat that we live in which we rent out to tenants.
Investors in property make money in two ways – from the rental income derived from their tenants and, depending on market conditions, the rise in the value of the rental property they own. House prices have risen, on average, by 6.76% per year since 1997, compared with bank saving account interest rates of 3.6% (source: Swanlow Park).
Over this period of time, this approach to wealth accumulation made a lot of sense. However, the past is the past and there’s no guarantee this will continue forever or even go into reverse as they did during the Great Recession (source: Guardian).
The way buy-to-let house purchases and rental income are taxed was changed in the Budget of 2015 (source: BBC). The change in stamp duty taxation has made getting into the sector a lot more expensive and the profit made on rental income is also taxed at a much higher rate.
It gets worse if you already earn a lot of money. “If you’re a higher rate tax payer and your mortgage interest payments are 75% or more of the rent you receive, your profit disappears. For additional rate tax payers, that level is 68%,” according to TWP Accounting.
Buy-to-let was always a long-term hold. With higher entry costs and lower profits after tax, buy-to-let may be a longer-term hold than ever.
Some of the biggest returns seen in the last 10 years for investors have been in the “passion investment” sector – specifically wine, art, classic cars, Chinese ceramics, stamps, and antique furniture.
The wine version of the FTSE-100 is the Livex index. In August 2001, it stood at 93.49. In February 2018, it was at 312.16 – it had more than tripled in value.
However, whether with wines, cars, art, or watches, most passion-based marketplaces don’t offer investors great price transparency because most sales are made privately with little or no public record made of the exchange. Passion investing requires a high degree of knowledge and an enhanced ability to detect when someone is taking advantage of what they perceive to be gaps in your knowledge.
Approach with lots of care.
Alternative investment classes
There has been a proliferation in the number of different types of investments available in recent years including:
• Crowdfunding platforms – investing in business, property, and social enterprise projects
• Peer-to-peer lending – online platforms bringing connecting people with money to lend to people who want to borrow money
• Venture capital – investing in early-stage start-up scheme. EIS-, SEIS-, and SITR-qualified companies offer investors significant tax breaks to reflect the risk they take in backing new and unproven businesses.
What you need to consider when making an investment
All types of investment involve risk. Please do not risk any money that you can’t afford to lose, later on, no matter how commercially sound the scheme you wish to invest in seems and no matter how confident in producing a return the organisers and promoters of that scheme seem to be.
Always check with the Financial Conduct Authority’s ScamSmart website portal for helpful advice and useful resources.
You should always consider “liquidity”. Liquidity refers to the ease and speed with which you can sell your investment onto another person or organisation. If you place money into an investment which does not allow you to withdraw your money for an agreed length of time, please make sure that you only invest money you don’t need immediate access to. If you invest in a market where there are not that many buyers and where transactions are irregular, you may wait weeks or months to sell your asset and that sale may occur at a substantial discount to the value you believe your asset holds.
The Azurite Property Bond
The Azurite Bond is a property bond offering for sophisticated investors and high-net-worth individuals, providing the opportunity to invest in the residential infrastructure of Monaco.
To learn more about the Azurite investment, please download our brochure here.