A cash windfall does not come with a manual
DO you stand to come into an inheritance during your life?
Have you kept well in with Bomad (the Bank of Mum and Dad), or with Auntie Agatha, who’s always had a soft spot for you since that day you dyed her poodle to match her blue rinse?
Well, you’re in good company. A third of people have already received, or expect to receive an inheritance at some time in the future, according to new numbers from the financial experts at Hargreaves Lansdown (HL) in Bristol. Their new findings are based on a survey of 2,000 people they did in April.
The thing is, they also found that over half of us (52 per cent) admit we wouldn’t have a clue how to get the most out of the money.
A private banker told me once that the ‘windfall rich’ – those who come into money suddenly and unexpectedly, but don’t seek financial advice – often end up broke again someday, because they blow the lot rather than set it to work for them in sensible investments.
Just last week we mentioned that, according to the pension consultancy LCP, a third (32 per cent) of people taking money out of their pension savings then put the money into cash accounts, like a cash Isa, or a savings or current account at the bank. With low interest rates and inflation now running at 2.5 per cent and rising, that money is losing its spending power hand over fist.
This pattern was confirmed in the HL report. They found that over a third (38 per cent) of people said they would put an inheritance into a savings account, while only 15 per cent knew that investments, where your pennies stand a far better chance of growing ahead of inflation, are probably the way to go.
Given that the Office for National Statistics tells us the average inheritance in the UK is £11,000, the losses incurred could be substantial. If you take advice on investments, however, so could the gains.
HL’s report has worked out your potential losses, if you keep your savings in a savings account, compared to what you could gain by setting up some investments.
Assuming an interest rate of 0.5 per cent in a savings account, which is about the best you’ll get at the moment, compared to a 5 per cent annual return if the money had stayed invested, then over 20 years you would lose out on £17,686 you could otherwise have had.
Investments, properly handled with good financial advice, almost always outperform cash in the long term.
By the way, there’s an age factor in this, too. HL found that people over 55 are quite financially savvy. They understand that savings accounts aren’t the place to ‘stash your cash’ at the moment.
Younger people aged 18-34, funnily enough, have copped on as well, and are also quite financially informed.
It’s the middle group, aged 35-54, who tend to be a bit at sea when it comes to knowing the difference between saving and investing. Ironically, they are the very ones who are at the age to receive an inheritance.
Inheriting a pot of money does not, unfortunately, mean you inherit the skills to handle it.
This is why quality independent financial advice is crucial. It helps you get the benefit you earned when you dyed Auntie Agatha’s poodle blue.
A cash windfall does not, unfortunately, come with a manual.
Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com