What should you do with an inherited investment portfolio?

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

Many are at risk of making blunders like selling immediately and putting the money in a current or savings account, missing out on valuable tax breaks – or even holding onto shares because the certificates have sentimental value.

Women and middle aged people are the least confident about managing inherited investments, according to the research by Hargreaves Lansdown. 

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

Financial management: Some 48 per cent of women feel confident about handling inherited investments compared with 56 per cent of men

‘Half of us wouldn’t have the faintest idea what to do if we inherited investments from a loved one, and with one in three of us expecting to inherit something, there’s a reasonable chance that an awful lot of us will face this dilemma,’ says Hargreaves personal finance analyst Sarah Coles.

Millions of people hold stocks and shares Isas, or individual shares, unit trusts, investment trusts and investment-based insurance products, she points out.

‘If we don’t know what to do with the investments, there’s a risk we just cash them in,’ says Coles. ‘But converting investments into cash could come at a high price. Rock-bottom interest rates – and rising inflation – can quickly erode an inheritance left in the bank.’

Hargreaves’ survey of 2,000 adults found 38 per cent would put an inheritance in a savings account and 8 per cent in their current account, while 15 per cent said they would invest it.

Sarah Coles: Converting investments into cash could come at a high price

Coles says if you put the average sized inheritance of £11,000 into a savings account, you could lose out on £17,686 over 20 years. 

That assumes a 0.5 per cent rate on the savings account and a 5 per cent annual return if you’d kept the money invested.

The Hargreaves survey found 48 per cent of women feel confident about managing inherited investments compared with 56 per cent of men.

‘This is particularly alarming given that men are more likely to invest, and women tend to marry older men and outlive them. It raises the risk that women will inherit investments and have no idea what to do with them,’ says Coles.

Meanwhile, 45 per cent of 35-54 year-olds feel confident about managing inherited investments, versus 54 per cent of those aged 18-34 and 55 per cent of those aged 55 and over.

Coles says this reflects the fact that middle aged people tend to be less confident about their finances than other generations.

‘The older generation are more likely to be investors themselves, and increasingly so are the younger generation, some of whom have discovered investing during the pandemic.’

What should you do with investments you have inherited?

‘Inheriting investments, especially if you know nothing about investing can be a daunting experience,’ says Rob Burgeman, investment manager at Brewin Dolphin. ‘The first thing to do is don’t panic.’

‘Unless you have a compelling and urgent need for the cash, do not simply sell everything at the first opportunity. 

‘With interest rates still at rock bottom levels and inflation rising, holding the cash on deposit is likely to see the real value (after adjusting for inflation) fall over time.

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

‘It may well be that the portfolio was constructed with someone’s specific circumstances in mind.

‘After all, a portfolio designed to maximise income to help to pay for care fees is unlikely to be appropriate or optimised for the requirements of someone in their mid-50s who is still working. 

‘Each case, then, is likely to be as individual as you are.’

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

These could include the following, he says.

– Should you pay your mortgage off or continue with your current timetable for doing so?

– How can you take full advantage of the opportunities to shelter your windfall from taxation through Isa allowance, pension contributions and so on?

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

Rob Morgan, chief analyst at Charles Stanley Direct, says: ‘It may seem daunting, and the research does seem to highlight people’s instinctive reaction to sell and move to cash, but take time to think through your options.

‘Think about the objectives you have for this money. You may well have some short term plans to spend it, but if your goals are more than five years away you could be far better off keeping it invested and growing the money further.

Morgan suggests you consider doing the following when dealing with inherited investments.

– Overhaul the portfolio: ‘If you have elected to keep some or all of the investments do you need to change them? The former owner of the investments may have had specific objectives such as generating a regular income, which may not be applicable to you.

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

‘If you want to maximise growth potential rather than income generation it requires a completely different approach and set of investments.

‘The level of risk might need tweaking or possibly substantially altering – from low to high, or vice versa depending on circumstances.’

Morgan says this could mean changing the weighting of a portfolio from equities to safer assets such as bonds, or the other way around as applicable.

Read a guide to reviewing and rebalancing a portfolio here, and to asset allocation here. 

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

‘Taking action to shelter these investments in available tax wrappers could save you tax further down the line.

‘This could take the form of a ‘Bed & Isa’ or ‘Bed & Sipp’ – which serves to transfer the assets to a tax wrapper through selling and buying them back, or in the case of a spouse inheriting Isa assets by using their one off ‘additional permitted subscription’ Isa allowance, which is on top of the usual annual Isa allowance.’

– Take practical action: ‘If you have inherited physical share certificates these can be “dematerialised” so that you can hold them electronically, which is likely to be more convenient and allows you to sell right away at a time of your choosing.’ Read more here about the pros and cons of doing this. 

What are the pitfalls to avoid?

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

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

2. Sticking it in cash: The effects of inflation mean your money could lose value in real terms.

3. Assuming it will last forever: If you’ve come into some serious money, you may be tempted to spend without any real plan. There’s the risk you could burn through it much quicker than you imagine.

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

5. Getting emotionally attached to ‘mum’s shares’: Some beneficiaries keep investments that don’t suit them, simply because they find it difficult to let go. This is even more likely if there are paper share certificates that you feel sentimental about.

6. Not reconsidering your portfolio as a whole: If you already have investments, you need to work out how the inherited ones fit into your portfolio. They could make it less diversified and skew the risk level.

7. Ruling out taking advice: You may feel that paying for advice will eat into the inheritance, but if you’re not confident about investing, an adviser can help you manage the investments, and protect them from the taxman.

8. Not considering the tax position immediately: While you don’t want to make any rash decisions, you do need to pay attention to tax, especially if you inherit investments in a pension.

9. Not taking advantage of any ‘additional permitted subscription’: Savers that have inherited an Isa from a spouse or civil partner can apply for an APS, which is an additional Isa allowance.

This means that inheriting the Isa won’t eat into your own Isa allowance (£20,000 for 2021-2022).

10. Forgetting about the Financial Services Compensation Scheme protection: If liquidating investments is the right thing to do for you, bear in mind that if you have more than £85,000 in cash you should try and spread it across different institutions.

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