Question: I’ve just come into some money (£240k) following the loss of a parent and I think I should be seeking financial advice as I want to make sure I’m making sensible decisions for my future. Do I have enough money to do this? I’m intimidated by the process because I’ve never felt confident about money.
Answer: It can be difficult to focus on anything when you have experienced the death of a loved one, so the most important thing to do initially is to allow time to adjust to any new circumstances and not feel the need to rush any decisions – financial or otherwise.
If you are to do anything with some haste, you could put your money in an easy access savings account before you make more lasting resolutions. Several now pay a rate of between 4.5% and 5% and while these rates will come down in time, your money is safe and it should act as a good stop-gap before you decide on a longer term solution. Provided an organisation is covered by the FSCS (where your money is typically safeguarded to the tune of £85,000 per organisation), temporary high balances – of up to £1 million – are protected in your bank account, building society account or credit union account for six months.
It’s positive that you recognise the need for financial advice. Receiving a lump sum is one of the times when the opinion of a professional is often appropriate. Advice tailored to your situation can provide valuable reassurance that you are making the right decisions and also help to ensure that you are best positioned to make the most of your windfall.
It is also not uncommon for people to feel intimidated by the process and worry that they don’t have enough financial experience or insight. Most of us are not taught how to manage money and the industry can be very off-putting given the proliferation of financial jargon: a 2021 survey by the Money and Pensions Service found that almost half (45%) of adults in the UK do not feel confident about managing their money.
This is something which worries me a lot and we need to address – it cannot be right that such a high proportion of us lack confidence in financial matters. After all, whatever money we have or will have, determines our futures and we should be fully engaged to help drive the best possible outcomes.
You should also put your concerns aside over whether your inheritance qualifies as being enough to warrant taking financial advice. In the UK (according to the ONS), the average individual pension pot for those aged 55-64 is £107,300 – with holders recommended to seek advice before they retire – so you should be confident your £240,000 also requires an appropriate level of attention.
Even before seeking advice, you should consider paying off outstanding debts – especially as the cost of servicing some debts (loans or credit cards) can be surprisingly high. You should also set aside some money for emergencies, so you won’t need to dip into the money you put to work for a longer term – typically we would suggest having six months’ worth of readily accessible cash.
People often take financial advice because they have a specific need, they want to build or refine a resilient financial plan for the future, and they are looking to maximise the chances of reaching their financial life goals. This lump sum will hopefully put you on the path towards achieving your objectives and an adviser will work with you to ensure you have the right structure in place to help you manage your money efficiently (alongside any other assets you may hold, as appropriate) while helping you to avoid costly mistakes.
They will most likely recommend you contribute towards a pension or ISA (or both) for the considerable tax breaks if you are not already doing so. With a pension, for example, you can put a maximum of £60,000 a year into a plan and, if you were to do so over a number of years, the £240,000 you have now would be boosted by the government to £300,000 – and this is before any investment gains you might make, which could be considerable over 10 to 20 years or longer.
Their recommendations will naturally depend on what you want to achieve and what your timeframes are for achieving your goals. Effective retirement planning might be a priority, or you might wish to pay off a mortgage and repurpose those monthly outgoings, or you might want to save for something else. A personalised conversation and a plan that is guided by your overall circumstances will help you gain a deeper understanding of what you can realistically achieve.
I would caution not to overpay for either financial advice or any subsequent investment recommendations. Some advisers may try and charge you up to 5% upfront on your lump sum for initial advice and then a further ongoing advice charge, as well as investment costs. Added together, these can take a meaningful – and potentially unnecessary – chunk out of the money that should be yours.
It’s important not to feel pressured into doing anything: make sure you understand what you are being asked to pay and the impact on your inheritance sum. Don’t rush into a decision without a full understanding of the service you are paying for and making sure that it is what you actually need.
As a general rule, you will expect to pay for someone to invest your money, and this should be achievable at an annual fee of around 1% or less. Financial planning advice is a separate service, however. As discussed, you may want a one-off plan to help guide you on the topic of what your inheritance now means in the context of your longer-term financial planning. This type of service can be accessed at £200 per hour and may require, for example, 8-10 hours of work (ie amounting potentially to much less than the upfront charge of 5% that I mentioned before).
If you decide to take ongoing annual advice afterwards, it’s likely to cost roughly 0.50% a year in addition to the investment management fees. This should be a separate decision, rather than being baked in whether you need/want it or not, since the initial plan may be sufficient to guide you over the next few years without the need to take ongoing annual advice.
It is positive that you are considering the need for financial planning advice to help you make the most of your inheritance, despite your fears of being intimidated by the process. If you are able to take the time to consider your options and find the type of advice that fits your needs, it will help you make the most of your lump sum and provide a useful framework as you plan for the future.
This article was published in the I on 23 January, 2024.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. Please note, the value of your investments can go down as well as up.
The answer here does not represent financial advice, nor should it be interpreted as a recommendation to invest.
