Inheritance can be a thorny topic, which we often dread discussing with family. As a result, many people put the conversation off until their parents or grandparents actually die. By which point, deciding what to do with your inheritance can feel somewhat overwhelming, on top of the emotional turmoil and grief you are likely to experience.
In light of this, whilst it might be a difficult conversation, it can be a good idea to think about having it now (well ahead of time) if this is possible. It can save a lot of pressure for yourself later, as well as avoiding potential family fall outs.
Having a clear grasp of what is coming to you can be immensely helpful for your financial planning. However, it’s important to be realistic. Millennials in particular (i.e. those born between 1981 and 1996) tend to have very inaccurate expectations about how much wealth they will one day inherit from their parents, anticipating a sum of around £130,000. In all likelihood, however, the median inheritance currently stands at £11,000.
The place of an inheritance in financial planning
Of course, some fortunate people will inherit more, and £11,000 is certainly nothing to turn your nose up at. This sum could make a huge difference to your family. However, it’s important to keep your potential, future inheritance in perspective. There are many events out of your control which might affect how much you eventually receive.
For instance:
● Unforeseen taxes/debts. Your parents or grandparents might have promised you tens of thousands of pounds one day. However, it is very difficult for you to know the full nature of their wealth or financial situation. They could be facing an inheritance tax bill or debt repayment which eats into the value of your inheritance, when it comes to dealing with the Estate. This can happen even if parents appear financially astute.
● The cost of care. Your parents or grandparents might be very healthy now, but sadly none of us know what will happen in the future. Dementia, Alzheimers and Parkinsons affect thousands of people in the UK, often leading to them needing around-the-clock professional care. The fees for these services can be very high and can easily reduce the value of an Estate, which would have otherwise been passed on as an inheritance. Care Home fees, for instance, can cost over £30,000 per year which residents are expected to pay themselves, if they have over £23,250 in capital assets.
● Remarriage. In reality, it is quite common for people to remarry later in life. This might occur following divorce, or perhaps bereavement of a husband or wife. Regardless of how it might happen, this could affect your inheritance since, by default, the Estate will be distributed according to the Rules of Intestacy, if there is no Will in place stating what should happen in the event of death. In this instance, if the Estate is valued at less than £250,000, then the surviving husband or wife will receive everything.
What are the implications of all this? Well it basically means that for most people, an inheritance should take on a “supplementary” role rather than “primary” pillar within your financial plan. In other words, if one day you do receive the inheritance you hope for, then it will be a welcome addition to your finances and wealth. If it does not arrive in the form, timing or manner in which you might expect, then your financial plan will not be affected or ruined as a result.
Ways to use inheritance money
So, what are some options for your inheritance money, should it come your way?
1. Settle debts. If you have any debts weighing heavily on your mind or monthly bank balance, then it may be a sensible idea to consider paying these off or reducing them. For instance, clearing £200 in monthly debt repayments could free up a lot of breathing space, allowing you to place more funds elsewhere in order to build up your assets (e.g. saving into a pension).
2. Emergency funds. If you do not already have 3-6 months’ worth of living expenses saved as an emergency fund, then it can be a good idea to commit some of your inheritance money towards building up this safety net. This will give your family peace of mind and financial stability in the unfortunate event of either you or your partner losing a job or needing to suddenly cover an expensive bill (e.g. a replacement boiler).
3. Pay off the mortgage. If one of your main financial goals is to live mortgage-free as soon as possible, then paying off your mortgage (either as a lump sum or regular mortgage overpayments) could be an attractive option. Be careful to check your mortgage lender’s terms, as there can often be charges for repaying your mortgage debt over certain thresholds.
4. Invest some of it. If you deposit a substantial inheritance into an ordinary savings account, then in today’s low interest rate environment, it is likely to start losing its value over time, due to inflation. However, investing it in a pension fund or a Stocks & Shares ISA could be a way to help the money grow over time.
5. Enjoy it. Perhaps you are in the fortunate position where you are already well on track to achieving your financial goals and could instead put the money towards something more luxurious – maybe you would prefer to treat your family to an lovely holiday or buy a new car. If so, then enjoy!
