Personal Finance

How to invest your children's inheritance


Inheritance is a lovely way of passing on a substantial gift to loved ones, but for those receiving a lump sum it could be the first time they have control of a significant nest egg.

Increasingly, grandparents are splitting their fortune among not only their children but also their grandchildren.

As a parent, knowing how to deal with this can be much harder than deciding on how to invest, save or spend their own inheritance. Telegraph Money asked two financial advisers for the best ways to invest on behalf of children.

Younger children

Sam Jennings of Jennings & Co Financial Planning, said parents should first check whether the money is wrapped in a trust, and if not then they should look to do so, particularly for larger sums.

The two most common are a bare trust and a discretionary trust. In both cases, the parent who set up the trust names the child as the beneficiary and nominates trustees to help make decisions and administer the money along the way.

In a bare trust, the child is named as the beneficiary and under normal circumstances will receive the money as soon as they turn 18. 

Under a discretionary trust, the child is still named as a beneficiary but the timing of the money paid to them is at the discretion of the trustees – when they feel the time is right. Also, under a discretionary trust, the beneficiary can be changed, making it much more flexible and may work better if multiple children are inheriting, as the money can be kept together, although this can lead to disputes.

Alan Chan of IFS Wealth & Pensions said for smaller amounts, parents might want to look at taking out a Junior Isa. The current limit per year is £4,368, full details of which can be found in the box below.

For young children, it’s best to invest the money in the stock market because historically it has been the best-performing asset to buy for the long term (10 years or more).

For those parents that do not have time to manage a portfolio, a passive fund that invests in stocks around the world would be best. Our preferred option is the Legal & General International Index Trust, which is one of the lowest-cost routes for investors, although others are available.

As the child grows older, parents should look to dial down the risk accordingly, until they are given the money for themselves and can decide what to do with it.

Adult children

Passing on inheritance from loved ones to older children is easier, in theory, as parents just have to hand over the money. However, they can still give advice and try to help guide where the money should go. Some will need it for a house deposit or other expenses in the near future.

Mr Jennings said if this is the case then the best, albeit boring, advice would be to keep that money in a savings account. There is a £20,000 limit on a cash Isa, which would wrap some money up tax-free.

Premium bonds could be another option. These are backed by the government and although no guarantee of interest, there is the possibility of some winnings.

If a house deposit is still some way off despite the inheritance, the first port of call should be a Lifetime Isa (Lisa), as the government tops up anything put in with an extra 25pc, so up to £1,000 a year, providing it is used to buy a house worth less than £450,000. 

Mr Chan said they can choose between cash or stocks and shares, but for anything less than five years, the general rule is to stick to a cash Lisa.

If they have a longer term view, it may be that a stocks and shares Isa is most appropriate. Again, a passive fund is the easiest to understand at first, but the more they can learn early, the more likely they are to have success later in life. 

Other options, depending on their age, could include topping up their pension or investing in a buy-to-let property.  The below calculator shows how much someone can expect to make over their working life by investing in each.

They could also therefore put some aside and invest themselves, either through active funds or by buying individual shares. Our favoured list of 25 funds is a good place to start on the former, while the Questor column is full of tips each day if they want to own stocks.


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