A survey conducted by Hargreaves Lansdown shows that 46% of those who have received or are expecting an inheritance payout will leave it in a current or savings account through fear of making bad financial decisions.
Out of the 2,000 people questioned, almost half will leave their inheritance in cash, with 38% looking to use a savings account and 8% looking to use their current account.
Younger people are more likely to leave it with their bank or building society, with 52% of 18–34-year-olds doing so compared to just 41% of 35–54-year-olds. But does this cause problems for savers later down the line?
Leaving your money in a savings account could reduce its value over time
While leaving your money in a bank account may be the simplest and safest method of saving, you may be limiting the potential of your money to grow.
For some, this will be the correct decision. Sarah Coles, personal finance analyst at Hargreaves Lansdown, identified two situations in which it might be worth keeping the money in cash. These are:
- If you’re struggling with bereavement and want to put it away temporarily
- If you have plans to spend it within the next five years.
But for many, it likely isn’t the best option. While many fear making the wrong investment decisions, they may be making a more critical financial planning error instead, just by keeping it in cash.
2 risks to keeping an inheritance in cash savings
As Coles put it: “Ironically, while sticking an inheritance in a bank or building society account seems like a safe option, it runs two risks.”
The first of these risks is that your savings may reduce in value thanks to inflation. Inflation represents the rate at which prices are rising in the UK, so if the inflation rate is 2%, as it is in August 2021, then the average cost of living has risen by 2% when compared to this point last year.
While your savings may be gaining a little interest in a savings account, it is likely not to match the rate of inflation. Inflation may therefore erode your savings.
The second is that, if you have inherited a significant sum that you’re now keeping in cash, the Financial Services Compensation Scheme only protects the first £85,000 of your cash with each financial institution. This means that, should the financial services firm you are with fail, you’ll only be protected up to this amount.
The alternative to saving in cash is to invest, as it offers the potential to generate higher returns. Options such as a Stocks and Shares ISA allow you to invest in a diverse range of companies from around the world, enabling to you take advantage of stock market performance.
While the value of your investment can go down as well as up and you may not get back the full amount you invested, and past performance is not a reliable indicator of future performance, over time investing can often provide a better return than leaving your savings in cash.
Experts usually suggest that you only consider investing if it’s for a period of five years or more.