Spend or save, what would you do with your inheritance?

If you received an inheritance what would you spend it on?  A sudden windfall, depending on the amount, can mean a new car, luxury holiday or renovation. It’s a question that finance firm SunLife asked 3,000 adults in a recent survey and it appears more people would rather be practical than splash out. Brits would choose to save or pay off debts with the majority of a £100,000 inheritance and only spend £21,000 of it. “The research shows saving money can make us happier than spending it,” says Ian Atkinson from SunLife.

Looking further into the stats, the findings showed on average that those surveyed would:

  • Save £57,000
  • Use £16,000 to pay down their mortgage
  • Set aside another £6,000 for debts and money owed

We’re always being advised on the importance of saving and whilst it may seem sensible to want to save a large inheritance, this may not be the smartest way to use the money. The Money Advice Service recommends prioritising paying off credit card or personal loan debts before looking to stash away the cash. This is because the interest you pay on outstanding debt is generally a lot higher than the interest you may earn on an ISA or other savings account.

On the spending side of things, a holiday came up tops for all age groups as the number one thing they’d spend their inheritance on. Home improvements, a new car, kids and grandchildren and a ‘large item’ where the other most popular choices for spending.

The research found one in five adults rely on receiving an inheritance and expect more than they’ll actually receive. Hoping for an average of £147,000, Brits are more likely to be handed down a figure closer to the £119,000 mark.

Here are some fast facts about inheritance and some tips on dealing with the windfall:

  • You will need to pay inheritance tax if an estate handed down to you is valued at over the threshold, which is currently £325,000. Anything over this amount will be charged at 40%
  • If 10% or more of an inheritance is left to charity, the inheritance tax is reduced to 36%
  • If your inheritance generates an income you may need to pay income tax on it
  • If the inheritance is passed down as a gift you may need to pay tax on it if it is over the threshold and the person dies within 7 years
  • Don’t just blow the full lot. Sit down and work out where you are financially, including debts and financial goals
  • Consider paying off or reducing your debts first. As mentioned above, the interest rate is normally higher on debts than they are on savings
  • Consider saving or investing, but think about the risks. You can get a better yield from investments but there is risk that you could lose some or all of your money, whilst a savings account may give your lower returns but the money is kept safe
  • Think about whether you want to save it all or spend some of it and what that spending figure will look like. You might want get a financial advisor or planner to help you map out how best to deal with your inheritance.

If you do get an inheritance then ensure you plan right and it can change your financial circumstances for the better.