Where should I invest my inheritance?

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Ask the expert at Smith & Pinching about investing an inheritance - Credit: Getty Images/iStockphoto

I inherited a significant amount this year and my bank savings account now has £150,000 in it. I usually keep about £20,000 in easily accessible money for emergencies but would like to invest the remaining £130,000. Should I invest it in my pension, in a separate investment portfolio or a stocks & shares ISA?

Richard Barker, chartered financial planner with Smith & Pinching

Richard Barker, chartered financial planner with Smith & Pinching - Credit: Smith & Pinching

Richard Barker of Smith & Pinching responds:

The answer to your question will depend on your overall financial plan, including your objectives for your retirement and your likely other needs between now and then. It’s really important to see each financial decision as part of an overall strategy.

I suggest you meet with an independent financial adviser, ideally from a firm of chartered financial planners, to analyse everything about your financial circumstances and your situation. A financial adviser will help you identify your targets and set you on track to achieving them.

Your question asks about the merits of investing in a pension, as opposed to doing so in an investment portfolio or stocks & shares ISA. It’s important to realise that pensions and stocks & shares ISAs are actually tax wrappers containing investments. They all have their place in financial planning, but the difference lies in their tax treatment.

With pensions, your contributions are invested with a view to achieving investment growth. The advantages of pensions are the tax relief given on your contributions, adding immediate value, and the fund grows tax-free. The principal drawback is that money invested in a pension fund is locked away until you reach the minimum retirement age – currently age 55 but rising to age 57 in 2028.

Pension contributions are subject to two limits: the annual allowance restricts how much you can contribute in the tax year and the lifetime allowance limits how much you can have without a charge being applied when you take your benefits. These rules are complex, so advice is vital.

Stocks & shares ISAs provide tax-efficient investment growth, with no tax payable on gains made within the ISA or income paid from it. However, the annual ISA allowance is £20,000, so you wouldn’t be able to invest your whole inheritance in an ISA in a single tax year. Unused ISA allowances can’t be carried forward.

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Investing outside either a pension or ISA framework can also be tax-efficient, with dividend allowances and capital gains tax allowances available for use, as well as certain higher-risk investments such as venture capital trusts and enterprise investment schemes, which have special tax treatment. The key is to plan carefully to take advantage of the allowances that are available to you.

Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

For more information, please visit www.smith-pinching.co.uk