In our bi-weekly series, readers can email in with any question about their finances to be answered by our expert, Charlotte Ransom. Charlotte has 30 years’ experience working in financial services and wealth planning, including 10 years as a partner at Goldman Sachs. She co-founded Netwealth, which specialises in low-cost investing and financial planning advice. If you have a question for her, email us at money@inews.co.uk.
Question: My five grandchildren (two in school, three young workers) are about to come into a large inheritance – about £75,000 each in six months’ time. How can we help guide them on handling large amounts of money responsibly?
Answer: An inheritance can be a wonderful gift but can also create a challenge when individuals have not previously had to think about investing. This becomes all the more important for younger investors since their timeframes are long and the choices they make, or those made on their behalf, will play out over the long term.
While your five grandchildren are all young, the difference in their ages means their circumstances, and therefore the treatment of their inheritance, will be slightly different.
Taking the older grandchildren first, you mentioned they may use the funds as a deposit to buy a home of their own which could mean their timeframe will be shorter. If they are hoping to get on the property ladder in the next year or so, they can achieve reasonable returns while they are looking for a property. With interest rates still relatively high, it is possible to earn around 5 per cent a year in an easy access account and their money will be covered by the Financial Services Compensation Scheme, so it will be secure.
It is worth remembering that searching for a home can take time, and interest rates are likely to start coming down in the UK from around the summer, with further cuts expected as the year progresses. This will be helpful from the perspective of mortgage rates, which should cheapen in line with rates reducing, but will also affect the returns achievable on short-term, easy access accounts.
However, if your older grandchildren wish to hold off from property for a while, or if they don’t need all of their inheritance to fund a deposit, they could consider starting, or adding to, a longer-term investment plan with the proceeds.
Employers are now required to offer a pension to their employees, so they could potentially boost their pension contributions, with their employer matching them. The added benefit of a pension for those with a long-term outlook is that the government will also top up the value of the pension each year – by £20 for every £80 you put in to boost it to £100 for basic rate taxpayers.
However, pension savings cannot be accessed until much later, so if your older grandchildren prefer not to make that commitment and instead wish to save up for other life expenses over a medium-term horizon, an Isa is a good way for their money to grow tax effectively – with investment returns all accruing tax free within an Isa wrapper and not being subject to tax on withdrawal.
The maximum annual amount that can be contributed to an Isa is capped at £20,000 per individual, so the balance of the inheritance could then be invested in a general investment account (which is taxable). You should note, as I have covered several times in this column, that investing is typically a better solution than sitting in cash savings for any medium or long-term plans since it gives you a greater chance of growing your pot meaningfully and combating the effects of inflation.
For the younger grandchildren, they should also find a secure home for their money that has the potential to grow. A good start is to contribute up to £9,000 a year to a Junior Isa, which can then be converted to a full Isa when they reach 18 and contributions rise to a maximum of £20,000 a year. The balance could be set up in Bare Trusts in their individual names – these are low cost, simple vehicles which allow a parent or grandparent to give a junior investor access to investment returns.
These compounding investment returns over time should not be underestimated. Even if we assume nothing is added to this inheritance amount of £75,000 – and if we assume an average growth per year of 5 per cent – over 20 years the total value could grow to around £199,000, and to £324,000 after 30 years. These figures are a powerful incentive on the merits of investing over the long term, and about getting into the habit of putting some money away regularly.
Since you mention that you and your family have little financial knowledge, you may want to read up on the subject. A couple of websites to start you on your journey are the InvestSmart section of the Financial Conduct Authority’s website and the savings and investing section on the Money Helper website. Many sources of useful investment information exist online, but an organisation that is not funded by adverts (with various providers urging you to invest with them) could be more impartial – and feel less stressful.
I would also advocate open conversations about money with your children and grandchildren. When families talk frankly about money, about their hopes or concerns, it can help to ease an otherwise unfamiliar topic and can lead to better decision-making and outcomes.
We shouldn’t take anything for granted or assume that the way we think about money will be similar to those of different generations. In fact, a survey we compiled with money coach Emma Maslin revealed that there is often a difference in perception among families when it comes to inheritance and this is often better discussed.
Talking and listening helps, and this is where you may seek the help of a qualified financial adviser to help guide you and your grandchildren on what they should consider. A trained professional will help you understand the choices you have, highlighting key areas of tax efficiency and focusing on the proven factors which can make the most of the inheritance: such as lower annual fees, ensuring your investments are properly diversified and staying the course.