Do you repay debt? Contribute to the balance of your superannuation? Help out other family members? Invest? Or do you blow it all on the holiday of a lifetime?

It’s going to depend on your personal circumstance and, of course, your personality. No matter your personal circumstance, you’d be well advised to talk to a certified, independent financial planner.

But generally speaking…

What are your options?

Repay debt

Although you might feel guilty using your inheritance to repay personal debt, this strategy can be the most financially beneficial.

Even with historically low interest rates, repaying personal debt provides a guaranteed rate of return with no investment risk. Any earnings from investment could be taxed at up to 49%. Therefore, assuming an interest rate of 5% per annum, an investment would need to return more than 9.8% per annum to match prepaying debt. Although this return is possible from assets like shares and property, it cannot be guaranteed.

For outstanding credit cards balances, where interest is charged at more than 20% per annum, the argument is even more favourable.

Add the financial calculations to relief you’ll feel by reducing your debts and this could be one of the best things you can do with inheritance money.

Contribute to superannuation

If you’re approaching retirement, or even if you’re not, contributing funds to superannuation could provide an extremely tax effective outcome.

Investment earnings are taxed at a maximum rate of 15%. When you retire and start drawing a regular pension there is potential that investment earnings could be completely tax free. No other tax structure provides this level of tax efficiency.

Following recent changes to legislation, the maximum that an individual can contribute to superannuation from personal funds is $100,000 per financial year, with the ability to ‘bring forward’ two future years of contributions (assuming you are under 65) and make a larger one off contribution of $300,000 in a single financial year. This provides a couple with the option of contributing up to $600,000 to superannuation.

Should I invest my inheritance?

Although superannuation provides substantial tax benefits, there are restrictions on the ability to access funds. Generally, funds cannot be accessed until you reach preservation age (between 55 and 60, depending on your year of birth). Plus you must be permanently retired. If you’re more spring chicken than mature hen, superannuation may not be your best option.

Investing outside superannuation (either in individual names, joint names or via a trust) may provide greater flexibility. And gives you the option to contribute to superannuation further down the track.

The investment of funds should reflect your short, medium and long term objectives. Ideally a diversified portfolio, with exposure to each of the asset classes including cash, fixed interest, shares and property, would provide smoother returns over time and minimise risk. You should consult a financial planner or investment advisor to determine the appropriate allocation to each of these asset classes for your individual situation.

Blow it all!

A luxury cruise? 50 of your friends and family on a private island for a week? A Gucci wardrobe?

Of course you’d get some short term fun with your inheritance money but twenty years down the track you might be wishing you saved some of the inheritance. That doesn’t mean you shouldn’t treat yourself a little – life’s about balance.

In summary

When considering your options, depending on whether you have inherited cash, shares or property, it is important to determine any potential capital gains tax implications from the sale of asset within an estate.

Although Australia does not have ‘death duties’, the sale of assets within an estate can be subject to capital gains tax.

If you have received an inheritance or are likely to do so in the immediate term, you should consult an independent financial advisor to review your situation and determine the right strategy for you.

Hewison Private Wealth are certified, independent financial advisors, wealth managers and superannuation / SMSF experts. If you would like to speak to a financial advisor on how you can secure your financial future and put an inheritance to good use please contact us 03 8548 4800, email [email protected] or visit www.hewison.com.au

Please note: The information provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.