It can be challenging to know how to use an inheritance once you’ve received it. You may still be experiencing grief due to the loss of a loved one or might feel overwhelmed by your options. However, it’s important to not rush and take your time when making financial decisions regarding your inheritance.


If your inheritance is held in a cash account, the Financial Service Compensation Scheme (FSCS), which provides insurance against financial loss, will typically cover inheritances held in cash accounts with licensed banks and building societies. This implies that even if the financial institution collapses, your money is still safe.

Deposits of up to £85,000 per person, for each bank or building society, are typically protected by the FSCS. However, it also offers protection for eligible temporary high balances, such as inheritances of up to £1 million for a period of six months. If your inheritance is larger than this, you should consider dividing it among various banks.

Once you are ready to do something with your inheritance, we recommend you consider boosting your pension. Below are four reasons why:


Boosting your pension may enable you to retire in greater comfort              

You may live the retirement lifestyle of your choice if you start increasing your pension today. Increasing your pension could give you more financial freedom later in life, whether you want to travel, spend time with your grandchildren, or engage in hobbies.

GET TAX RELIEF On pension contributions

The government offers tax relief when you contribute to your pension as a way of encouraging individuals to invest for the future. As a result, your deposit will immediately receive a boost. Tax relief is provided at your highest income tax rate. If you pay taxes at the basic rate and deposit a lump payment of £20,000, you will save £5,000 in taxes. If you pay taxes at a higher or additional rate, you must file a self-assessment tax return to receive your full entitlement.

a tax-efficient way to invest

When the money in your pension is invested, your pension can grow free from Capital Gains Tax (CGT), making it a tax-efficient method for long-term investments.

Although returns cannot be promised, traditionally the market has produced positive returns over longer time periods. Your retirement funds also have the potential to increase in real terms because your pension may be invested for many years.

It might lower a possible Inheritance Tax bill

You might be considering what you will leave behind for loved ones if you inherit something. Using your pension to successfully pass on money could make sense if Inheritance Tax (IHT) is a worry.

If the value of your estate reaches the £325,000 nil-rate threshold for the tax year 2023–2024, IHT may be due. You might also be entitled to use the dwelling nil-rate band, which is £175,000 for 2023–2024, if your primary residence will be passed on to your direct descendants.

Importantly, for IHT reasons, pensions aren’t typically regarded as a component of your estate. Depending on when you die away and how the beneficiary uses the funds, the tax on an inherited pension may be much lower than the 40% IHT rate.


Financial Clarity

Increasing your pension contributions also has the disadvantage that the money won’t be immediately accessible. Normally, access to pension savings is not permitted until age 55, which will increase to age 57 in 2028. Therefore, if you needed to increase your income, you wouldn’t be able to dip into it.

This is why it’s important to evaluate your current financial situation before increasing your pension funds. You might want to keep some of your inheritance in a cash account if you don’t already have one in order to strengthen your financial resiliency. Or you could look at other choices like a Stocks and Shares ISA, if you wish to invest but want to receive the returns before you reach 55.

Take some time to consider your goals and gauge your level of financial security before deciding how to spend your inheritance.

What could you tax-effectively contribute to your pension?

The amount you can tax-efficiently contribute to your pension each tax year is capped by the Annual Allowance. If you go over the Annual Allowance, you won’t get tax relief on the amount above the cutoff and you can get hit with an extra fee.

For the tax year 2023–2024, the Annual Allowance increased from £40,000 to £60,000 (or 100% of your annual earnings).

Importantly, you can carry forward unused Annual Allowance for up to three years and still receive tax relief if you have a sizable lump sum you want to deposit into your pension. Reviewing your contributions from the past several years may help you maximise your Annual Allowance if you want to increase your pension through an inheritance.

Your annual allowance can be less if you’ve previously taken a pension income or if you make a lot of money. If you’re unsure of how much you can tax-efficiently contribute to your pension, please get in touch with us.


Our financial advisers would be happy to help you with all your inheritance matters. Book your FREE initial consultation today to understand your options.


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