Inherited investments – 5 easy mistakes that will cost your client dear

According to a recent survey featured by the Independent, nearly half of those (48%) who inherit investments are not sure what to do with them. This is an alarming thought when you consider the survey also found a third of those questioned expect to receive investments as part of an inheritance.

What’s worse, 46% of those questioned said they would probably cash in the investments and put the money into current or savings accounts. This could mean that instead of exposing the cash to potential growth while invested, it may lose value in real-terms due to historically low interest rates and the rising cost of living.

If you have clients who are about to inherit investments, or likely to in the future, they could be at risk of making the same mistake. Read on to discover why cashing in investments could cost your clients dear, other common mistakes, and how speaking with a financial planner could help them avoid decisions they later regret.

1. Cashing in the investment

Even with the market downturn in 2020 as Covid gripped the world, investing money for the long term has typically provided more growth than putting money into cash savings.

The below graph shows the long-term performance of the FTSE 100. As you can see, even with downturns along the way, the index has increased significantly over the last three decades.

Source: London Stock Exchange

According to the Independent, if you cashed in the average sized inherited investment of £11,000, and put it into savings accounts, your client could lose £17,686 over 20 years.

The calculations are based on a savings interest rate of 0.5% and a 5% annual return if you’d kept the money invested.

If you have clients who have recently inherited investments, or expect to, speaking to a financial planner could help them understand what they have and avoid a decision that may cost them dear.

2. Acting in haste

If your client does not know what to do with the investments, they could rush into a decision simply to make one as quickly as possible.

If, instead, your client takes their time to consider their options, and takes professional financial advice, they’re likely to have a better understanding of what they have and what their options are.

3. Getting emotionally attached

If the investment is not performing as well as hoped, your client may be reluctant to switch to one that could offer greater growth potential because they see the investment as “mum’s shares”.

Known as “endowment bias”, this is where an emotional attachment causes people to value their investments more highly than they should.

Working with a financial planner could help your client see the investment as just that: an investment.

4. Not seeing it as part of a financial strategy

If your client sees the inherited investment as being outside their wealth, they may think differently about it and make decisions they wouldn’t typically make.

Seeing the investments as part of an overall wealth strategy could ensure they make better choices. For example, it might be better for them to switch the inherited investments to ones that provide them with a more diverse portfolio, or more tax-efficient options.

A financial planner will help your clients create a holistic financial strategy that ensures their existing wealth and the inherited investment work hand in hand.

5. Not considering the tax implications

If your client inherits investments, they may become liable to taxes in the future, such as Capital Gains Tax.

Speaking with a financial planner could help ensure your client’s investment portfolio is as tax-efficient as possible, and they’re using all their allowances as effectively as possible to reduce any tax liability.

Get in touch

If you would like to discuss how we could help clients with inherited investments, please contact us by email on hello@ardentuk.com, or call 01904 655 330.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Please note, this article only deals with England and our understanding of English Law.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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By talking about your current situation and listening to your aims, we create a personalised plan that will put you on a path to achieving your aspirations.

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