Inherited investments – 5 costly mistakes you need to avoid

An article by This is Money suggests that one in three people expect to receive an inheritance, and of those, many could receive investments as part of it. While this may be good news, the rest of the article makes for less comfortable reading.

It reveals research found that half of Britons would not know what to do with investments once they’ve received them, with many making common mistakes that could be costly. As clients of HarperLees Financial Planning, you have peace of mind that we’re always here to help ensure you sidestep these mistakes and maximise the growth potential of inherited stocks. 

If, on the other hand, you would like to know what the mistakes are, or know someone who could receive stocks or shares as part of an inheritance, read on to discover five errors that need to be avoided.

1. Cashing in the investment

A particularly alarming finding of the research, which was carried out by Hargreaves Lansdown, is that 38% of those questioned said they would cash in the investments. Doing this, and then putting the money into a savings account means the inheritance is no longer exposed to growth potential, which could significantly reduce its value in real terms over time.

This is largely because of inflation, something that has hardly been out of the headlines in 2022. According to the Office for National Statistics, inflation reached 9.9% in August, which is significantly higher than the best rates being offered for savings accounts in September 2022. 

According to Moneyfacts, on 13 September the top rate for an instant access savings account was 1.81%. The best five year fixed-rate savings account offered 3.75%. 

This means that any money you put into a savings account is unlikely to keep pace with the rate of inflation, which means your inheritance could lose real term value over time.

As the stock market could expose your money to greater growth potential, keeping your inheritance invested could help inflation-proof it and potentially boost its value. To demonstrate this, you may want to consider research by Schroders, which revealed that between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average. 

Cash returned an average of 6% a year. While this suggests that investing may provide greater long-term growth potential, always remember that past performance is no guarantee of future performance.

2. Remaining emotionally attached

While it may be understandable, a common mistake is to become emotionally attached to the investments you have been left. Seeing them as “mum and dad’s shares” and holding on to them for sentimental value when they are underperforming may result in losses that could othewise be avoided.

We would be happy to explain the performance of the investments inherited, and whether switching them to other assets might be a savvier move. 

3. Remaining in investments with the wrong level of risk

As the investment was probably set up by the person who passed away, the level of risk the investments are exposed to may not be suitable for the beneficiary. For example, if the deceased was older than you, the investments might be in lower-risk funds that could mean reduced growth potential.

If, on the other hand, they had significant amounts of capital, the investments might be in a high-risk fund, which could experience substantial losses if the stock market drops. This level of risk may not be what you would want, or be appropriate for your financial circumstances.

As clients, you’ll know how careful we are to ensure that the level of risk an investment is exposed to is right for you, and we would be happy to help someone you know achieve this too. This could help them reach their financial goals while having peace of mind that their inheritance is exposed to a level of risk they’re comfortable with.

4. Separating the investments from your own wealth

If you, or someone you know, inherits an investment, it’s important to see it as part of your wider wealth. Often an inheritance is thought of as being separate and treated differently to the beneficiary’s own investments.

The could lead you to make a decision that you wouldn’t normally take, which could cost you dearly in the long term. Seeing the investment as part of your own wealth might provide an opportunity for you to diversify your portfolio, for example, and this could help reduce risk.

5. Forgetting the tax implications

Inherited investments may become liable to Capital Gains Tax or Dividend Tax, and forgetting this may result in an unexpected and substantial tax charge.

We can investigate ways to ensure that the investments remain as tax-efficient as possible, and that you use all of your available allowances to reduce, or potentially negate, a tax liability.

Get in touch

Another common mistake with inherited investments is to rush into a decision because you’re unsure what to do. While this is unlikely to be the case if you’re already clients as we will have discussed your options, you may have a friend or family member who would benefit from a conversation with us.

We can help them understand the investments that have been left to them, and the options that are available so that they can make a decision that’s right for them. Just email us at info@harperlees.co.uk or call 01277 350560, we’d be happy to help.

Please note

This article is for information only. Please do not act based on anything you might read in this article. 

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.