What should you do with an inherited investment portfolio?

Half of people would be stunned at what to do if they inherited investments, new research reveals.

Many risk making blunders such as selling immediately and putting the money in a current or savings account, missing out on valuable tax benefits — or even holding stocks because the certificates have sentimental value.

According to Hargreaves Lansdown’s research, middle-aged women and people have the least confidence in managing inherited investments.

Below we take a look at what to do if you are left with someone’s investment portfolio and the common mistakes to avoid.

Financial management: About 48 percent of women are confident in handling inherited investments, compared to 56 percent of men

“Half of us wouldn’t have a clue what to do if we inherit investments from a loved one, and since one in three of us expect to inherit something, there’s a fair chance a lot of us will be faced with this dilemma.” faced. Hargreaves says personal finance analyst Sarah Coles.

Millions of people own stocks and shares of Isas, or individual stocks, unit trusts, investment trusts and investment-based insurance products, she explains.

“If we don’t know what to do with the investments, there’s a risk that we’ll just cash them in,” Coles says. “But converting investments into cash can come at a high price. A floor interest rate – and rising inflation – can quickly erode a legacy in the bank.’

Hargreaves’ research of 2,000 adults found that 38 percent would put an inheritance in a savings account and 8 percent in their checking account, while 15 percent said they would invest it.

Sarah Coles: Converting investments to cash can come at a high price

Sarah Coles: Converting investments to cash can come at a high price

Coles says that if you put the average inheritance of £11,000 in a savings account, you could lose £17,686 in 20 years.

That assumes an interest of 0.5 percent on the savings account and an annual return of 5 percent if you had kept the invested money.

Hargreaves’s research found that 48 percent of women are confident in managing inherited investments, compared to 56 percent of men.

“This is especially troubling as men are more likely to invest, and women tend to marry older men and outlive them. It increases the risk that women will inherit investments and have no idea what to do with them,” Coles says.

Meanwhile, 45 percent of 35-54 year olds are confident in managing inherited investments, compared to 54 percent of 18-34 year olds and 55 percent of those over 55.

Coles says this is a reflection of the fact that middle-aged people are less confident about their finances than other generations.

“The older generation is more likely to be investors themselves, and increasingly the younger generation, some of whom discovered investing during the pandemic.”

What should you do with investments you have inherited?

“Undertaking investments, especially if you don’t know anything about investing, can be a daunting experience,” said Rob Burgeman, asset manager at Brewin Dolphin. “The first thing to do is not to panic.”

“Unless you have an urgent and urgent need for the money, don’t sell everything at the first opportunity.

“With interest rates still at rock bottom and inflation rising, holding cash will likely cause real value (after adjusting for inflation) to fall over time.

Rob Burgeman: The first thing to do is DON'T PANIC!

Rob Burgeman: The first thing to do is DON’T PANIC!

‘It may well be that the portfolio has been put together with a person’s specific circumstances in mind.

“After all, a portfolio designed to maximize income to pay for health care costs is unlikely to be suitable or optimized for the needs of someone in their mid-50s still working.

“So each case is probably as individual as you are.”

Burgeman says a worthwhile investment can be good quality financial advice from someone who can look at you and your family’s specific circumstances and consider a range of issues.

These may include the following, he says.

– Should you pay off your mortgage or continue with your current schedule?

– How can you take full advantage of the opportunities to protect your windfall from taxation through Isa benefits, pension contributions, etc.?

– What are your hopes and dreams for the future and how can these inherited funds help you fulfill them?

Rob Morgan, principal analyst at Charles Stanley Direct, says: “It may seem daunting, and the research seems to highlight people’s instinctive response to sell and switch to cash, but take the time to think about your options.” .

“Think about the goals you have for this money. You may have some short-term plans for spending it, but if your goals are more than five years away, you’d be much better off keeping it invested and continuing to grow the money.

Morgan suggests that you consider the following when dealing with legacy investments.

– Portfolio review: ‘If you have chosen to keep some or all of your investments, should you change them? The former owner of the investments may have had specific objectives, such as generating a regular income, which may not apply to you.

Rob Morgan: If your goals are more than five years away, you'd be much better off keeping an inherited portfolio invested and growing the money further

Rob Morgan: If your goals are more than five years away, you’d be much better off keeping an inherited portfolio invested and growing the money further

“If you want to maximize growth potential instead of monetization, that requires a very different approach and set of investments.

“The level of risk may need to be adjusted or may need to be changed significantly — from low to high, or vice versa, depending on the circumstances.”

Morgan says this could mean changing a portfolio’s weighting from stocks to safer assets like bonds, or vice versa, if applicable.

Read a guide to assessing and rebalancing a portfolio here, as well as asset allocation here.

– Think about tax: ‘How are your investments that you have inherited currently held? In many circumstances it will be outside an Isa or pension, in which case they will be subject to income or capital gains tax in the future.

‘By taking action to accommodate these investments in available tax papers, you can save tax later on.

This may take the form of a ‘Bed & Isa’ or ‘Bed & Sipp’ – which serves to transfer the assets to a tax wrapper by selling and buying them back, or in the case of a spouse who is Isa- assets by using their one-time ‘additional allowed subscription’ Isa fee, which is in addition to the usual annual Isa fee.’

– Take practical action: “If you have inherited physical stock certificates, they can be ‘dematerialized’ so that you can keep them electronically, which is probably more convenient and can be sold immediately at a time of your choosing.” Read more about the pros and cons of this here.

What are the pitfalls to avoid?

Sarah Coles of Hargreaves Lansdown explains the 10 most common mistakes when inheriting investments.

1. Acting too soon: If you’re still grieving, getting your head around investments can go a step too far, so you can just give up and sell. Take the time to think about how best to manage the money.

2. Putting it in cash: The effects of inflation mean that your money can lose value in real terms.

I inherited a pension pot from a family member

What should I do with it and how much tax do I owe? Read more here.

3. Assuming It Will Last Forever: If you’ve made some serious money, you might be tempted to spend with no real plan. There is a risk that you will burn through it much faster than you think.

4. Not considering your finances as a whole: Keeping the money invested may seem like a smart move. However, paying off expensive debts, building up an emergency buffer or supplementing your pension can be a better use of the inheritance, depending on your situation.

5. Get emotionally attached to “mom stocks”: Some beneficiaries hold investments that don’t suit them simply because they find it hard to let go. This is even more likely if there are paper stock certificates that you are sentimental about.

6. Don’t rethink your portfolio as a whole: If you already have investments, you need to figure out how the inherited investments fit into your portfolio. They can make it less diversified and skew the level of risk.

7. Exclude From Taking Advice: You may think that paying for advice comes at the expense of inheritance, but if you’re unsure about investing, an advisor can help you manage the investments and protect them from the tax authorities.

8. Do not immediately take the tax situation into account: Although you do not want to make hasty decisions, you should pay attention to the tax, especially if you inherit investments in a pension.

9. Not using an ‘additional allowed subscription’: Savers who have inherited an Isa from a spouse or registered partner can apply for an APS, which is an additional Isa benefit.

This means that inheriting the Isa will not come at the cost of your own Isa benefit (£20,000 for 2021-2022).

10. The . forget Protection of the Financial Services Compensation Scheme: If liquidating investments is the right choice for you, keep in mind that if you have more than £85,000 in cash, you should try to spread it across different institutions.

This is because if a bank collapses, the FSCS will protect only up to £85,000 held by each person at each institution.

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