Investing an inheritance or a gift

A lump sum arrives, and it rarely arrives at a good moment. An inheritance usually comes with a bereavement attached. A gift can come with a quiet expectation that you will do something sensible with it.

Nothing has to happen this week. Money sitting in a bank account for a month or two while you think is a perfectly reasonable decision, and a far better one than a rushed choice you regret. What is worth avoiding is letting a month become five years by default, because leaving it alone is itself a decision about your money.

First, the two things that come before investing

Clear expensive debt. A credit card charging 24% costs you more, with certainty, than most investments are likely to make. Paying it off is the one guaranteed return available to you. Our guide on paying off a credit card covers the order to do it in.

Keep a buffer in cash. Three to six months of your outgoings, held somewhere you can reach it the same week. This is not lost money, it is what stops you selling an investment at a bad moment because the boiler has gone. See how to build up an emergency fund.

Then the question that decides everything else

When do you need this money back?

Not what you would like to happen to it. When you actually need to spend it. Every sensible answer that follows depends on that one number, and it is the question a regulated adviser would ask you first.

Inside two years, cash is generally the right home for it. A house deposit you are putting down next spring does not belong anywhere that can fall in value before spring arrives. Look for a decent rate rather than accepting whatever your current bank pays.

Beyond that, cash starts to carry a risk of its own. It is a quiet one, because the balance on the statement never goes down. What falls is what the balance buys. We have set out what that costs over ten years in money sitting in cash, and what inflation is doing while the number stays still.

Between a savings account and the stock market

This is the part most people holding an inherited lump sum have never had explained to them. The choice is not only "leave it in the bank" or "buy shares".

A bond is a loan. You lend to a government or a company, they pay you interest for a fixed period, and they repay you at the end. Historically bonds have moved less sharply than shares, and they have paid more than cash. They can and do fall in value, and the borrower can fail to pay, which is exactly why most people buy a bond fund rather than picking individual bonds themselves. A fund spreads your money across hundreds of loans, so no single borrower failing is the end of it.

Where a fund is actively managed, the manager tactically buys and sells across the market rather than holding whatever an index contains, and can look at the high yield end, where lower quality borrowers pay more precisely because the risk of not being repaid is greater. More yield always means more risk. Anyone telling you otherwise is selling something.

Our guide to fixed income explains how these funds actually work, and what is a bond has a tool that lets you move through the levels of risk and see the trade-off at each one.

Where you would hold it

Most people use a stocks and shares ISA, where returns are free of UK tax, up to £20,000 in a tax year. Above that, a general investment account has no limit and no tax shelter. Both are opened through an investment platform. We list UK platforms authorised by the Financial Conduct Authority, alphabetically. We are not paid by any of them and we do not rank them.

If the sum is large, or the tax position is complicated, this is worth an hour with a regulated financial adviser. Most will give you an initial consultation without charging for it.