The British risk wasting inheritance pots by having them vegetate on bank accounts paying little or no interest.
Nearly half of people who have received or are expecting an inheritance leave it in a checking or savings account, according to research by Hargreaves Lansdown – an investment platform.
Of those who choose to keep money in cash, 8% leave the money in their checking account, while 38% put it in a savings account.
Beware of inflation: leaving your inheritance in a savings or checking account that earns little or no interest can cause its value to drop in real terms.
It has also been found that men are three times more likely to leave an inheritance in their checking account than women, while women are slightly more likely to put their money in a savings account instead.
Sarah Coles, Hargreaves Lansdown, said: “When money and emotions collide you can end up making all kinds of weird decisions, and there are few things in life as emotional as grieving.
“We may be perfectly logical about money in all other aspects of life, but when it comes to an inheritance, we are so afraid of making a mistake with an inheritance that there is a real risk that we end up wasting it through excessive caution. ‘
With an inflation rate of 2% last month and an average easy-to-access account paying just 0.18%, according to Moneyfacts, those with an inheritance hidden in checking or savings accounts are at risk of seeing their money. erode.
Reasons to leave a cash inheritance
1. You can’t decide what to do after temporarily placing the inheritance in cash, so it stays there.
2. You feel pressured not to take risks for sentimental reasons, so assume that a bank or mortgage company account will be the safest place for money.
3. You feel more comfortable keeping your money in cash.
4. You have a nagging worry that things will go wrong, so you want money beyond your emergency fund – just in case.
5. You don’t know enough about alternatives to depositing money in the bank – and you don’t want to pay for advice.
Based on the current average easy access rate, if you hide £ 100,000 today, you might expect to end up with £ 100,904 after five years.
But if inflation were to stick to the Bank of England’s target and an average of 2% over the next five years, in real terms the sum would be worth £ 92,050.
The real interest in such an account would therefore be minus 8.77 percent, as the purchasing power of nominal money erodes over the five years.
Coles said, “Leaving a long-term cash windfall will subject it to the ravages of inflation and beneficiaries will lose some of the purchasing power of their money.
“Investing the lump sum instead might prove to be more fruitful, especially in the long run, and using the money to pay off debt or supplement a pension may be a much smarter choice.
“If you have more than £ 85,000 with a bank or building society, excluding NS&I, you also put yourself at risk if that institution were to collapse, as the Financial Services Compensation only covers clients up to this level per person and per institution. “
Is a savings account always a bad option?
In some cases, keeping money in a checking or savings account can make sense if you have not yet decided what to do with the money or if you intend to use the money. short term.
If you intend to spend the money within a year or so, perhaps to buy a property or to pay off debt, then keeping the money in an easy-to-access savings account might be an option. .
Best Easy Access Account, currently offered by Tandem Bank, pays 0.65% while providing instant access to savings and allowing unlimited deposits and withdrawals from a linked checking account.
An alternative option for those who may need to access the money is a notice account which allows savers to withdraw their funds after a notice period.
These typically range from 30 to 90 days, but can offer savers a better return than they might otherwise get with an easy-to-access account.
Investec Bank, for example, currently offers a rate of 0.7% for a 32-day notice account.
Coles said: “If you’re still in shock and aren’t ready to make a decision, temporarily putting the money in a savings account with a decent interest rate can be a smart move.
“Alternatively, if you have a specific plan for spending it over the next five years, or if you are saving for a specific short-term goal, cash may be the best option.”
It could also perhaps explain why younger beneficiaries are more likely to leave a legacy in the bank.
According to Hargreaves Lansdown – who would like more people to invest, rather than putting money into a savings or checking account, given his activity – 52% of 18-34 year olds will do just that, compared to 41% of 35 -54 years old. years.
“Younger people are more likely to have expensive short-term savings goals, like buying a property, so this might be the right place for the money,” Coles added.
Questions to ask to help you decide what to do with an inheritance
1. Do I have expensive debts that need to be paid off first?
2. Do I have an emergency fund? People of working age should have 3 to 6 months of essential expenses in an easily accessible account, while those who are retired need 1 to 3 years.
3. Have I paid any one-time fees that will help protect me and my family if things go wrong, such as writing a will and an enduring power of attorney?
4. Do I have adequate protection and insurance – for example, should I purchase 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 that I can use this as an opportunity to embark on investments for the future?
7. How much can I afford to spend and still have room for these other priorities?
8. If I already have some of these things, is it a chance to pay off my mortgage?
9. Now is the time to pay for financial advice?
10. Do I need this money or should I pass it on to my children or other family members?
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