What to do with a legacy investment portfolio?

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

Many risk mistakes like selling immediately and putting the money in a checking or savings account, missing out on valuable tax breaks – or even holding stocks because certificates have sentimental value.

Women and middle-aged people are the least confident about managing legacy investments, according to Hargreaves Lansdown’s study.

We take a look at what to do if you find yourself in someone’s investment portfolio and common mistakes to avoid below.

Financial management: around 48% of women feel confident in managing legacy investments, compared to 56% of men

“Half of us wouldn’t have a clue what to do if we inherited investments from a loved one, and with one in three expecting to inherit something, there is a Reasonable chance that many of us are faced with this dilemma, ”says Sarah Coles, personal finance analyst at Hargreaves.

Millions of people own Isas stocks and shares, or individual stocks, mutual funds, investment funds, and investment-based insurance products, she points out.

“If we don’t know what to do with the investments, there is a risk that we will just cash them in,” Coles explains. “But converting investments to cash could be expensive. Lower interest rates – and rising inflation – can quickly erode a legacy left in the bank. ‘

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

Sarah Coles: Converting investments to cash could get expensive

Sarah Coles: Converting investments to cash could get expensive

Coles says if you put the mid-size inheritance of £ 11,000 in a savings account, you could lose £ 17,686 over 20 years.

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

The Hargreaves survey found that 48% of women feel confident in managing legacy investments, compared to 56% of men.

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

At the same time, 45% of 35-54 year-olds feel confident in the management of inherited investments, compared to 54% of 18-34 year-olds and 55% of 55-year-olds and over.

Coles says this reflects the fact that middle-aged people tend to have less confidence in 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 to do with the investments you have inherited?

“Inheriting investments, especially if you don’t know anything about investing, can be a daunting experience,” says Rob Burgeman, Director of Investments at Brewin Dolphin. “The first thing to do is not to panic.

“Unless you are in dire need of money, don’t just sell at the first opportunity.

“With interest rates still at low levels and inflation on the rise, holding 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!

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 maximize income to help pay for child care costs is unlikely to be appropriate or optimized for the needs of a person in their mid-fifties who is still working.

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

Burgeman says that a worthwhile investment might be in good quality financial advice from someone who can look at you and your family’s particular situation and look at a range of issues.

These could include the following, he says.

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

– How to take full advantage of the opportunities to shelter your windfall from taxation via the Isa allowance, pension contributions, etc.

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

Rob Morgan, chief analyst at Charles Stanley Direct, said: “It may sound intimidating, and the research seems to highlight the gut reaction of people to sell and move on to money, but take some time to think about your options.

“Think about the goals you have for that money. You may well have short-term plans to spend it, but if your goals are more than five years away, you might be far better off keeping it invested and making more money grow.

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

– Portfolio overhaul: “If you have chosen to keep all or part of the investments, should you change them?” The former owner of the investments may have had specific goals, such as generating regular income, which may not apply to you.

Rob Morgan: If your goals are more than five years away, you might be much better off keeping a legacy portfolio invested and growing the money more.

Rob Morgan: If your goals are more than five years away, you might be much better off keeping a legacy portfolio invested and growing the money more.

“If you want to maximize the potential for growth rather than generating income, that requires a completely different approach and set of investments.

“The level of risk may require adjustment or perhaps a substantial change – from low to high, or vice versa depending on the circumstances. “

Morgan says that could mean shifting a portfolio’s weighting from stocks to safer assets like bonds, or the other way around, as appropriate.

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

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

“Taking steps to protect those investments within available tax envelopes could save you tax down the road.

“This could take the form of a ‘Bed & Isa’ or ‘Bed & Sipp’ – which serves to transfer the assets into a tax envelope by selling them and buying them back, or in the case of a spouse inheriting the assets. Isa’s allowance using their only one Isa Allowance “Additional Authorized Subscription”, which is in addition to the usual annual Isa allowance. “

– Take concrete action: “If you have inherited physical share certificates, these can be ‘dematerialized’ so that you can hold them electronically, which is probably more convenient and allows you to sell right away. of your choice. Learn more here about the pros and cons of doing so.

What are the pitfalls to avoid ?

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

1. Act Too Fast: When you are still grieving it may seem like it is going too far in the direction of investing, so you can just give up and sell. Take your time to think about the best way to manage money.

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

I inherited a pension pot from a parent

What should I do with it and how much tax do I have to pay? Read more here.

3. Assuming it will last forever: If you’ve made a lot of money, you might be tempted to spend without a real plan. You are likely to burn it out much faster than you imagine.

4. Don’t Think About Your Finances: Keeping the money you invested can seem like a smart move. However, paying off expensive debts, building an emergency cash reserve, or supplementing your pension might be a better use of the inheritance, depending on your situation.

5. Emotionally bond with “mum’s shares”: Some beneficiaries hold onto investments that are not suitable for them, simply because they have a hard time letting go. This is even more likely if there are paper stock certificates that you feel sentimental about.

6. Don’t reconsider your portfolio as a whole: If you already have investments, you need to determine how the legacy ones fit into your portfolio. They could make it less diversified and distort the level of risk.

7. Avoid taking advice: You may feel that paying for advice will weigh on the inheritance, but if you are unsure about investing, an advisor can help you manage the investments and protect them from harm. tax authorities

8. Don’t Consider the Tax Situation Immediately: While you don’t want to make rash decisions, you need to be careful with taxation, especially if you inherit pension investments.

9. Do not benefit from an “authorized additional subscription”: savers who 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 Isa will not eat away at your own Isa allowance (£ 20,000 for 2021-2022).

10. Forget about Financial Services Compensation Scheme Protection: If liquidating investments is the right thing for you, keep in mind that if you have more than £ 85,000 in cash, you should try to split it between different institutions.

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

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