The best way to invest inheritance money in 2022 — from stocks, pensions and paying off mortgages

Receiving an inheritance can be a pivotal moment in life, and it’s common to feel pressure to do the ‘right thing’ with the money. Receiving a lump sum can be a good trigger to reorganize your finances for the future, but some avenues may prove more fruitful than others.

In many cases, families are using this as an opportunity to make their way up the real estate ladder — but there are a variety of ways to spend your newfound cash.

However, be wary of inheritance tax, which results in individuals being taxed at a rate of 40 per cent on all assets above the £325,000 threshold.

The best use of your money depends on your age and circumstances. Telegraph Money examines three common scenarios below.

How to invest your inheritance money in 2022 in an age-appropriate manner

inherited at a young age

Younger heirs could benefit from holding onto smaller sums to give them more flexibility in the future, said Amy Pethers of wealth manager Brewin Dolphin.

If you know you’ll need to access the cash in the near term, say less than three years from now, it might be wise to hold it in cash, perhaps in premium bonds or an easily accessible savings account.

If you think you won’t need it for more than five years, you should consider investing in stocks for tax breaks. A sum of £10,000 invested in Isa stocks and shares would be worth £16,289 after a decade if it achieved annual growth of 5 per cent, Brewin Dolphin said.

Those who receive larger sums could also benefit from an Isa. The heir could move an amount equal to their full Isa grant, currently £20,000 a year, into a share Isa each year until it’s all in that tax efficient package.

If they invested £350,000, it would be worth £570,113 after 10 years, based on a 5 per cent annual investment growth of £220,113 after fees, Ms Pethers said.

In addition to a taxable investment portfolio and ISAS, they could benefit from additional pension contributions.

Pension contributions are ‘topped up’ by HMRC in the form of tax relief. This means that money that they would normally pay in taxes goes into retirement instead. Base rate taxpayers receive an additional 20 percent (of the gross amount) in additional contributions, while higher and additional rate taxpayers receive 40 percent and 45 percent, respectively.

However, that money won’t be available until age 57 at the earliest, so an annuity is far less flexible than an Isa or taxable investment account and may not be the best option for younger savers.

Ms Pethers added: “They should also work out how much they want to keep as emergency cash. We typically recommend around six months of necessary spending.” The best way to invest inheritance money in 2022 — from stocks, pensions and paying off mortgages

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