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The best ways to save or invest an inheritance

The best ways to save or invest an inheritance
What do you do with inherited money? If you've recently come into some money, here are a few ideas for what to do with it
“Sometimes an inheritance or windfall can come with some guilt or expectation of ‘doing the right thing’. Take a step back and think about the short, medium, and long-term goals that you already have—how will the windfall fit in with these? Are there life changes that you could make that will improve your standard of living or lifestyle?  
Sound advice from Lisa Conway-Hughes, a chartered independent financial expert with Westminster Wealth, and owner of Misslolly.com so this is me, taking a step back, and trying to find the best options for an inheritance which recently hit my bank account after my grandmother sadly passed away last year. 
"How will the windfall fit in with the short, medium, and long-term goals that you already have?"
My horizon isn’t currently filled with typical savings goals of property (living with my parents), a car (I don’t drive), or family security (am single). My inheritance is an unexpected bonus, but with how precarious self-employment can be, and longer-term, as yet unknown, financial needs that might crop up, it’s one I don’t want to waste.  
Here’s a look at some of the best options I’ve found, and their risks and rewards.  

Self-employed pensions 

A traditional pension has long seemed out of reach to me—with payment requirements, money lock, and other rules I couldn’t commit to. Finding pensions that are specifically aimed at/or welcome self-employed workers has been a revelation. Providers have created flexible deposit (within allowance rules) policies, with easy-to-use online apps, and a choice of funds to invest in. A few providers are: 
  • Nest: Workplace pension scheme set up by the government that the self-employed can join. Flexible contributions with a minimum payment of £10. Annual management fees and contribution charges apply, which are taken out of your pension pot.  
  • Pension Bee: Online plan with an app, annual fee and varied transaction charges depending on plans, including a tailored plan to move you to safer assets as you age.  
  • Penfold: Choice of four different plans, and you can adjust, top-up or pause contributions at any time. Pension calculators will help you work out how much to save.  
Self-employed pensions - how to save or invest your inheritance
Things to know: 
  • Annual and lifetime allowance rules for pension contributions.
  • Old pension providers may have exit fees to transfer over to a new scheme.
  • Read up on tax relief and any implications on personal, or self-employed earnings contributions.
  • There may be opt-out periods available should you need them.  

Tax implications

Financial coach and author of The Money Basics Peter Komolafe advises that the first step with any cash windfall is to consider tax implications.
"The first step with any cash windfall is to consider tax implications"
He comments,  “From a financial planning perspective, the priority should be tax efficiency first. This will mean maxing out your ISA allowance or contributing as much as you can to your 20k savings allowance. An alternative to your ISA could be premium bonds. Your returns are tax-free, easily accessible, and you might win a prize in their draw."
Let’s take a closer look at these options.
Premium bonds 
These are lottery-based savings bonds from National Savings and Investments, where each bond is given a number and has the chance to win a monthly tax-free prize. Minimum investment of £25 up to a lifetime investment of £50,000.
I’ve been saving in premium bonds for many years. It’s easy to buy more bonds, check prize records, and reinvest prizes, and I’ve been lucky enough to win a few. The safe place to put money away and forget about it, and the bonus surprise when you’ve won something.
Things to know: 
  • No notice period or penalty for withdrawals. 
  • Access by website, phone or post.  
I moved money from my bank-run ISA quite a while ago because the interest rate return was so bad, but ISAs have come back on many people’s radars again. This handy government guide explains how they work, and the different types of ISA you can get. These are savings accounts where you never get taxed on the interest, with Cash ISAs most popular.
ISAs - how to save or invest your inheritance
Accounts are available with many of the big-name providers, and smaller banks and building societies, with variable or fixed rate options to suit your needs. Check out the money pages in the national press, or Money Saving Expert for the latest rates information.
Things to know:
  • Minimum deposit for new accounts varies between ISA/Provider. 
  • Not all accounts are easy access and may charge if you withdraw. 
  • Can transfer to another ISA at any time, but will have to close one you are paying into, in the current year.  
Savings accounts
After looking at tax efficiency, Komolafe suggests a next step could be savings accounts. He says, “Next you might look at savings accounts with a high interest rate. Everyone gets a personal savings allowance which varies depending on how much tax you pay. For example, anyone paying the basic rate of tax (20%) can earn £1,000 in interest before they must pay tax. Higher rate taxpayers (40%) can earn £500 in interest and those on the additional rate (45%) don't get an allowance, meaning they pay tax on any interest they earn.” 
"There is a dizzying amount of savings account options available"
There is a dizzying amount of savings account options available, with variations in interest rates, minimum deposits, how accessible your cash is, minimum deposit amounts, and more. It’s best to check out a comparison site to compare providers and what they offer. Keep an eye out for any restrictions on withdrawals, any risks in locking your money away in a fixed rate account, and how the account operates (online, branch or by phone).
Things to know: 
  • Money is typically guaranteed up to £85,000 by the Financial Services Compensation Scheme, or localised protection schemes for other providers. 
  • Some savings accounts may require you to have an account with the same provider. 
  • Be aware of deposit commitments on regular savings accounts.  
Deciding how to save or invest your inheritance can be daunting, but hopefully these options will help you decide the best move for you. And don't forget, you can always split the money between multiple options!
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