A friend of mine expects to receive a modest windfall from an inheritance. Their now-deceased relative was sufficiently twice-removed to make the money both unexpected and also unencumbered with emotional baggage. (Notwithstanding my envious side-eye…)

“Well, I’d put it in a pension,” I said.

Just because the money had effectively fallen out of the sky, that doesn’t mean they should flush it down the toilet.

“Of course,” I continued, “I am not your financial advisor. Everyone’s situation is different so seek professional advice if you need it.”

Now it was my turn to get the side-eye.

“Also,” I whispered, leaning in, “Your capital is at risk, and you may get back less money than you started with.”

My friend did not get the joke. But they did buy me a coffee to hear more.

Why invest an inheritance in a pension?

My friend expects to receive about £30,000. That’s a significant amount of money for most people, but not a life-changing one.

Certainly not if they blow it on a car and a luxury family holiday to St Lucia.

For perspective, the average inheritance in the UK is around £11,000. Those average folks will have to pick either the car or the hols, I guess.

None of these sums will seem very big to Monevator readers well on their way to financial independence.

Indeed even if you’re younger, assuming you’ve calculated the vast wodge you’ll need to create a post-work income, you’ll know £11,000 doesn’t touch the sides.

However we should never underestimate the power of time, global equities, and compound interest:

£11,000 earning 10%	Final amount
Initial sum spunked away on holidays	£0
Invested for 10 years	£28,531
Invested for 20 years	£74,003
Invested for 30 years	£191,943

Yes yes, 10% is an optimistic return. And that £191,943 will probably be worth only £100,000 or so in three decades’ time in today’s money, assuming vaguely on-target inflation.

Then again, global equities have done about 10% over the past few decades.

What’s more, if you think returns are going to be a lot lower, then that’s even more reason to invest the money. You’ll need it!

Fun-sized frittering

A quick note before we get into taxes – I know, contain yourselves – on the hedonistic alternative to investing an inheritance in a pension.

I’m talking about the holidays, the conservatory, and the fancy cars.

I get it. Yes, I’d invest the money. But I said that’s what I’d do. I know myself!

For many people, spending an inheritance on something fun or meaningful – or both – will seem like a bigger bang for their buck than watching it vanish into a SIPP.

You might even decide that’s what the money was meant for. Especially if it’s something that enhances your quality of life on an enduring basis. Say a house extension, or a trip to see much-loved but far-flung relatives.

We all tend to mentally bucket money. Windfalls and inheritances for most people will land in a different – and perhaps entirely new – receptacle.

A compromise could be to tithe off some of the windfall for these non-investing purposes, then resolve to invest the rest. I’d suggest a percentage rather than some arbitrarily-sized fun fund. Cut your cloth, in other words.

Then again, you might know that your relative would have preferred you to save or invest the windfall. In that case investing will come easier.

What about the mortgage?

Sensible money goals like paying off your mortgage or – heaven forbid – any other outstanding debt sits alongside investing in the sound choice bucket.

Paying off your mortgage or investing is a live decision for anyone seeking financial independence. Especially so if you’re on a quick march.

But you should revisit your plan after a chunky windfall.

You might decide the lump sum gives you the luxury of being more risk averse, and hence paying down the mortgage.

On the other hand, perhaps it gives you the confidence to invest more instead?

Only you can decide what works best for you.

A puffed-up pensioned legacy

Let’s get back to doing something really fun with your money – like investing it in a pension! (Hey, this is Monevator. We do things differently here…)

The big bonus of putting your bequest into a pension is the immediate boost you’ll get from tax relief.

(I’m assuming here you’re still in your working years, rather than that you’re passing down wealth through a family of Methusalehs…)

Getting tax relief on pension contributions is the nearest thing to free money since, well, an inheritance.

Say you’re a higher-rate taxpayer. In this case your £11,000 pension contribution gets 20% tax relief upfront (£2,750).

That’s now £13,750 invested inside the pension.

As a 40% taxpayer you can then claim another 20% tax relief via self-assessment or your PAYE tax code. This will effectively refund you another £2,750 in cash.

Show me the money!

All told, your £11,000 inheritance has already ‘returned’ 66.67%:

• You have £13,750 inside your pension
• This cost you £8,250 (£11,000 minus the £2,750 higher-rate relief)
• Turning £8,250 into £13,750 is a 66.67% return

We have a choice as to how we model the subsequent return in the pension over the next three decades. That’s because we technically only have £13,750 in the pension pot. The rest of our initial return came as 20% cash tax relief.

To keep things simple, here’s how £13,750 would grow, again at 10%:

£13,750 earning 10%	Final amount
Initial sum frittered at Disneyland	£0
Invested for 10 years	£35,664
Invested for 20 years	£92,503
Invested for 30 years	£239,929

You won’t need to sit down with a stiff drink when you see that putting more money in upfront means you end up with much more at the end.

However, this understates the benefit of making the pension contribution as a higher-rate taxpayer – because of that additional £2,750 in tax relief from HMRC.

Let’s say by reinvesting the relief (which would generate more tax relief) and/or contributions from a salary, we are able to put the full whack into a pension.

We saw that the initial tax relief amounts to a 66.67% uplift on our net outlay:

• £11,000 increased by 66.67% is £18,333.70

Rounding down and redoing our table based on that figure:

£18,333 earning 10%	Final amount
Initial sum blown on a Beemer	£0
Invested for 10 years	£47,551
Invested for 20 years	£123,335
Invested for 30 years	£319,890

By investing the £11,000 inheritance over 30 years we’ve 30-bagged it. If anyone is looking down from anywhere fluffy and beatific, they’d surely be proud.

There will be taxes to pay when you withdraw the money from the pension, of course.

But that’s always true with pensions. Most people pay a lower tax rate in retirement.

Yeah but…

Of course, caveats and sidebars abound.

Besides the later tax you’ll have to pay, you might argue some people are already maximising their pensions, or that it’s a faff to fiddle with your schedule when you’re an employee versus a freewheeling self-employed type like me.

But there are ways to manage all this.

For example, you might have to increase your contributions from your salary to get the full benefit in the final table above, but you could use the tax relief as spending money in the meantime.

You’re saving on income tax in this case.

What’s more, if you’re able to use the contribution to reduce your salary below key thresholds then you might avoid nonsense like the £100,000 tax trap or losing child benefit, depending on your situation. Your effective return will therefore be even higher

Again, everyone’s strategy will need to be different. We’re talking big picture.

Rich but not dead yet

Perhaps you’re retired and you think none of this applies to you?

Remember you can still contribute £3,600 a year to a pension. If you’re under age 75 you should get 20% tax relief.

More importantly, this discussion might help frame how you think about giving.

I’ve put a 30 year row into the timetables above. But most inheritance receivers would be lucky (or perhaps more tactfully: unlucky) to get their money so early.

Gifts are different. If you’re 60 and you have 30-year old children, then passing on wealth now to go into their pensions could be far more effective than leaving them to inherit money that’s much less valuable in a couple of decades time, with all that potential tax arbitrage having flowed under the bridge.

It’ll also help with inheritance tax planning, if that’s something you worry about.

Naturally you’ll need to trust them and explain the plan if this is your goal.

Big boys trousered

Of course some lucky people will receive inheritances far in excess of the modest five-figure average we’ve considered above.

If you’ve found you now own the big house, a parlour full of Joshua Reynolds and George Stubbs knock-offs, some 5,000 acres, and a coterie of staff headed up by a man called Jeeves – or more likely these days an efficient Polish lady – then your mileage will vary. Not least the long crawl down the drive getting back from the funeral.

I’m sadly unqualified to offer much useful insight in this case, though I would love an invitation to the opening day after you’ve turned the whole lot over to the National Trust on seeing the first winter’s heating bills.

I suppose you could read this dusty article on the wealth preservation strategies of the rich.

What if your inheritance is chunkier than the usual, but not boosted up to Bertie Wooster levels of wonga?

Well, there are limits to how much you can put into a pension each year. You’re probably already contributing to a workplace pension or SIPP too (if not, why not?) and so stashing away, say, £300,000 is going to take some time.

Should you invest in buy-to-lets, or something even sillier like a start-up or a restaurant?

I probably wouldn’t. I’d put the money somewhere safe – cash, multiple FSCS protected bank accounts and National Savings & Investments – and have a ponder.

Firstly, look into carried forward allowances for pensions. This enables you to make use of unused previous pension allowances from the past three years. You might be able to pension away more of the windfall than you realise.

Once you’ve done your sums, you could find that between ISAs and your pension, you can get all the money into tax shelters within a decade or so, say.

That’s a long time, but remember the rest of your inheritance isn’t doing nothing while you wait.

On the contrary, it’s providing a rock-solid safety cushion. One that should be earning a respectable rate of interest at the time of typing.

This means you can probably adjust your asset allocation inside your tax shelters in the meantime, while you gradually move the money across over the years.

Let’s say your pensions and ISAs are currently tilted towards something like a 60/40 portfolio. So 60% in risky assets, and 40% in less risky stuff.

Factor in the newly-acquired six-figure inheritance onto the safety side of the ledger, and you might now effectively be running a 40/60 shares/bond split, for instance. That is, you’ve got much more in safer assets than had you targeted.

In this case you might ramp up your risk exposure in your invested portfolio in the tax shelters, by selling some bonds and buying more equities.

You can do this because the cash waiting to be invested is substituting for some or all of your previous safety cushion.

Your money, your problem

Of course your percentages will be different. I’m deliberately being vague throughout this piece because:

• Inheritances vary wildly
• Effective tax rates vary wildly
• The pension rules are fiddled with far too often
• Investment returns vary wildly, at least in the short term
• Risk tolerances vary wildly…
• …and might change after you inherit a life-changing sum
• Everyone’s goals are different

I’m afraid there’s nothing else for it but to roll up your sleeves and dig into the Monevator archives to work out your own plan.

I’m sure it’s what Great Uncle Reggie would have wanted.

I am writing this at 9.30 on a Monday morning, sitting in the garden. Mrs Accumulator has just waved to me through the window and I can scarcely believe she’s there.

The past year has been strange, full of awkward trials and tiny tribulations, but the moment that’s just passed between us – well, it doesn’t get better than that. ¹

About five years ago, ² I’d have been desperately fighting bin-fires at the office, with no Mrs TA within a country mile. 

Work would have felt like one of those mad videogames where pointless cack (pizza, pies, U-boats, whatever) hurtles at you down a conveyor belt while your energy bar ebbs away. 

Now I’m in a soggy garden with the scent of pine resin up my nose. It feels like heaven. 

God, that went fast

I haven’t had much time to reflect of late. To think about how chuffing lucky I am. Though the feeling bleeds through my every day. 

From one perspective, the past year has felt like an extra level in that crazy conveyor belt game: 

• Here comes a devastating diagnosis. Scratch one parent! (It’s not the end yet, but it’s the beginning of the end.)
• Now incinerate hundreds of hours on a communal endeavour with no ‘We’ in community. 
• Next, feel the spread of aches and pains that likely can’t be ignored much longer, nor fixed. Goddamn age. 
• Watch people you love trapped in torment. Feel powerless to help them.  
• Fail to fulfill some promises to good friends while you arbitrage the above. 

Yet from another perspective, I’m happy I met the challenges that came my way. Whether they’d feature among the golden beaches and labradors of a retirement brochure is beside the point. No-one else fancied it, so it had to be me. 

Perhaps I made a difference to my loved ones. And others further down my contacts list. Either way, it made me feel useful. That’s pretty vital for a retired male. 

Much of what I’ve done has no place on a CV, or Linkedin. It probably won’t make my memoirs (available soon!), or even a FIRE post about how amazing FIRE is. But I’m still glad I did it. 

It meant something to someone. It meant something to me. Certainly it was waaaay better than hitting the Q3 stretch target for BastardoCorps PLC. 

Virtually none of it was in the plan. 

This was the plan

Before I retired early, I sketched out an idealised structure for my week because I feared I might otherwise just lie in bed: 

• Monday – Walk, read, all day
• Tuesday – Monevator
• Wednesday – Monevator
• Thursday – New skill
• Friday – Volunteer
• Saturday – Day out with Mrs Accumulator
• Sunday – Day out with Mrs Accumulator

It all happens, but fragmented and frittered across formless weeks and months. No week looks like this. Also, the volunteer part has not featured me giving my time to a worthy cause, so I need to sort that out. 

Here’s a list of activities five-years-ago me thought I’d try with my oodles of spare time:

Try-out	Five-year verdict
Carpentry	No chance!
Growing vegetables	Didn’t happen
Wood chopping	Not so much
Foraging	Fuhgeddaboudit
Campfire nights	Done this! Once
Cycling for groceries	Dunnit! Um, not the 2-3 times a week I had in my notes
New skill – meditation, maths, Brazilian Jujitsu	Stares uncomfortably into the middle distance
Cooking	Yes! One new recipe in five years. Box ticked!
Hiking	Yes! TI can testify!
Coding	I’m off the hook: Claude’s ruined it for everyone
Hydroponics	What do you think?
Naps	Definitely! All over this
More writing	Blimey. Actually, yes
Home renovation	Yes! Ithangyew

So there you go. I award myself a First Class Honours in pottering, prevarication and lack of application. 

Take that Mr Money Mustache! This is how you start a movement. (Time-wasters only, please.)

Take it steady, 

The Accumulator

P.S. Our FIRE budget for 2025-26 was £29,366 for two. Actual spend: £29,432. Ooh, so close.

1. The knowledge that it doesn’t get better than that was passed on to me by The Investor, quoting the wise words of a text message from his late father: “Eating fish and chips from the best takeaway in the world. Mum only ate half hers. Had to finish it off. It doesn’t get better than that.”[↩]
2. This update is late![↩]