Banking

Are you squandering your inheritance by being too cautious?

Britons are in danger of squandering inheritance pots by keeping them vegetating in bank accounts paying little or no interest.

Almost half of people who have received, or are expecting, an inheritance leave it in a current or savings account, according to research by Hargreaves Lansdown – an investment platform. 

Of those that opt to keep money in cash, 8 per cent leave the money in their current account, while 38 per cent put it in a savings account.

Beware inflation: Leaving your inheritance in a savings or current account paying little or no interest may mean it’s value falls in real terms.

It was also found that men are three times more likely to leave an inheritance in their current account than women, whilst women are slightly more likely to put their money in a savings account instead. 

Sarah Coles, from Hargreaves Lansdown, said: ‘When money and emotions collide, you can end up making all sorts of strange decisions, and there are few things in life as emotional as bereavement.

‘We might be perfectly logical about money in every other part of life, but when it comes to an inheritance, we’re so worried about making a mistake with a legacy, that there’s a real risk we end up squandering it through excessive caution.’

With the rate of inflation last month at 2 per cent and the average easy-access account paying just 0.18 per cent, according to Moneyfacts, those with an inheritance stashed away in current or savings accounts risk seeing their money eroded away.

Reasons for leaving inheritance in cash

1. You can’t decide what to do after temporarily placing the inheritance in cash, so it just gets left there.

2. You feel duty-bound not to take a risk for sentimental reasons, so assume that a bank or building society account will be the safest place for the money.

3. You just feel more comfortable holding your money in cash.

4. You have a nagging worry about things going wrong, so you want money beyond your emergency fund – just in case.

5. You don’t know enough about the alternatives to leaving the money in the bank – and you don’t want to pay for advice.

Based on the current average easy access rate, were you to stash away £100,000 today, you could expect to end up with a sum of £100,904 after five years.

But if inflation were to stick to the Bank of England target and average 2 per cent over the next five years, in real terms the sum would be worth £92,050.

The real interest for such an account would therefore be minus 8.77 per cent, as the purchasing power of nominal cash is eroded over the five years.

Coles said: ‘Leaving a windfall in cash for the long term will subject it to the ravages of inflation and beneficiaries will lose some of the spending power of their money.

‘Investing the lump sum instead could prove more fruitful, especially over the long term, and using the money to pay off debts or top up a pension may be a much smarter choice.

‘If you have more than £85,000 with one bank or building society, excluding NS&I, you also leave yourself vulnerable if that institution was to collapse as the Financial Services Compensation Scheme only covers customers up to this level per person, per institution.’

Is a savings account always a bad option?

Keeping money in a current or savings account in some cases can make sense if you are yet to decide what to do with the money or may intend to use the cash in the short run.

If you are someone who may intend to spend the money within a year or so, perhaps towards a property purchase or paying off debts then keeping money in an easy access savings account could be an option.

The best easy access account, currently offered by Tandem Bank pays 0.65 per cent whilst providing instant access to savings, and allowing unlimited deposits and withdrawals to a linked current account.

An alternative option for those who may require access to the money is a Notice account which enables savers to withdraw their funds following a notice period.

These typically range between 30 and 90 days but can offer savers a better return than they might otherwise achieve with an easy access account.

Investec Bank for example is currently offering a rate of 0.7 per cent for a 32-day notice account.

Coles said: ‘If you’re still reeling from the bereavement and aren’t ready to make a decision, temporarily putting the money in a savings account with a decent interest rate can be a shrewd move.

‘Alternatively, if you have a specific plan to spend it within the next five years, or are saving for a specific short-term goal, cash may be the best option.’

This could perhaps also explain why younger beneficiaries are more likely to leave an inheritance in the bank.

According to Hargreaves Lansdown – which would want more people to invest, rather than put money in savings or a current account, given its business – 52 per cent of 18-34 year olds will do just that compared to 41 per cent of 35-54 year olds.

‘Younger people are more likely to have expensive short-term savings goals like buying a property, so it may well be the right place for the money,’ added Coles. 

Questions to ask to help you decide what to do with an inheritance

1. Do I have expensive debts that should be paid off first?

2. Do I have an emergency fund? People of working age should have 3-6 months’ worth of essential expenses in an easy access account, while those in retirement need 1-3 years’ worth.

3. Have I paid for one-offs that will help protect myself and my family if things went wrong, such as making a will and a lasting power of attorney?

4. Do I have adequate protection and insurance – for example, should I buy life insurance or income protection?

5. Should I put money into my pension, or am I already saving enough?

6. Have I covered the basics, so I can use this as an opportunity to get into investments for the future?

7. How much of it can I afford to spend and still have room for these other priorities?

8. If I’ve already some these things, is this a chance to pay off my mortgage?

9. Is now a good time to pay for financial advice?

10. Do I need this money, or should I pass it to my children or other relatives?  

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

Most Related Links :
todayuknews Governmental News Finance News

Source link

Back to top button