I'M ABOUT TO INHERIT £200,000, WHAT SHOULD I DO WITH IT?

In a few months I'm due an inheritance of £200,000 from my dad's estate and I have no idea what to do with it.

I have my home which is mortgage free, I have no workplace pension and I don't work, I'll need about £70,000 so that I can live and pay bills until I can have my state pension in six years' time.

I don't want to put the money in anything risky. I would really appreciate your help. A.E via email

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Harvey Dorset, of This is Money, replies: Any inheritance is usually a welcome one, but knowing what to do with such a large amount of money can be daunting.

You seem clear on how much of the money you will need to fund your living costs until you reach state pension age, so you know that you will need to place these funds somewhere that they can be accessed.

With this in mind, you will still be left with a sizeable sum that you can use to gain a decent return through various financial products.

While you may not need the remaining £130,000 in order to fund your immediate living costs, it is worth considering unforeseen circumstances that may arise in the future. As such it is important to ensure that some of this inheritance is accessible if you need it.

What you do with the remainder will depend on the level of risk you are willing to take.

Given that you would prefer safer options, and that you don't need immediate access to most of this money, a fixed rate savings account or notice savings account will likely offer you the best 'risk-free' rate.

Currently, OakNorth Bank is offering a 5.37 per cent interest account with a notice period of 95 days, while Cynergy Bank is offering a 5.16 per cent interest one-year fix.

However, you'll need to split the cash if you go down this route, as the Financial Services Compensation Scheme offers protection on £85,000, per banking licence. 

If you opt not to invest, you may miss out on returns far juicier than those mentioned above. 

This is Money spoke to two experts to find out what the best way is for you to make the most out of your inheritance

Sarah Arora, independent financial adviser at Flying Colours, replies: Although an inheritance is usually a welcome windfall, it's often a trigger for seeking financial advice, especially as it looks as though this has come at an opportune time for your retirement planning.

As I see it, your priorities are to ensure financial security, cover your living costs and to preserve the value of your inheritance.

Based on the information you've provided, I would recommend that firstly, you set aside an emergency fund of around £20,000 as a 'safety-net' to cover any unexpected expenses. 

Ideally, this should be kept in an easy-access savings account.

Next, you want to allocate around £70,000 to cover your living costs over the next six years. 

I would recommend that you place money in a series of fixed-term savings accounts, as this will provide you with low-risk and secure access to your funds.

As for the remaining £110,000 there are a number of options for you to consider. 

Given that you appear to have a cautious approach to your finances, I'd suggest you look at the following low-risk, cash-based options:

• Cash Isas – You can invest up to £20,000 per tax year in an Isa, which will earn interest tax-free. You can build the pot over the coming years by utilising this allowance.

• Premium Bonds – Premium Bonds are government-backed and offer a chance to win cash prizes tax-free. However, Premium Bonds don't pay interest, so the earnings you make on them, if any, won't provide reliable growth.

• Fixed rate-bonds – these offer a guaranteed interest rate for a fixed term.

However, with all of these options, it's important to note that even if interest rates are looking more attractive these days, inflation will erode the purchasing power of your money over time.

An alternative option is to invest your money in stocks and shares. This will naturally carry a greater level of risk than cash-based options. 

As such, there is always a risk that you may get back less money than you originally invested. However, there are ways to manage those risks.

One way is to invest in a diversified portfolio with a cautious risk profile, where funds are invested in a mix of various investment stocks, fixed income and commodities. 

This approach reduces the volatility of the overall investment. It's generally a good idea to consult with an expert financial adviser who can guide you towards an investment portfolio which aligns with your risk profile.

This strategy of saving and investing should ensure that your immediate needs are met while maintaining the value of your inheritance with minimal risk.

As an aside, it's important to ensure that you don't have any gaps in your national insurance contributions; otherwise, you may not receive the full State Pension when you retire. 

You can check on the government website: Check your National Insurance record - gov.uk - and if there are gaps, I'd recommend that you make voluntary contributions.

Whatever you decide to do with your inheritance, things will change over time: interest rates, products and your circumstances. 

That's why it's important to regularly review your financial plan to ensure you stay on track towards your retirement goals.

Charlotte Harrison, senior financial advisor at Skipton, replies: A good starting point would be to fully understand your how your lifestyle will be supported over the next six years and how that could differ once in receipt of your state pension. 

You have mentioned you would require £70,000 over the next six years to support with living costs and paying bills, it would be great to explore this further to ensure you have factored in any additional shorter-term ad-hoc spending plans such as holidays or car replacements, any interest you will receive on this money as well as the impacts of inflation.

Once we have established an amount of money that you are comfortable will support you up to state pension age, it would be sensible to leave this portion of your money in deposit-based accounts to ensure it is available when required. 

In addition to known expenditure, it is also sensible to hold a further contingency amount on deposit, this can act as a buffer to be used to support any unplanned expenditure such as home or car repairs. 

Shopping around for the best interest rates for these monies is also important to ensure this portion of your money is working as hard as it can for you.

After working out what monies are required to support your lifestyle up to state pension, we can then focus on what your lifestyle and spending patterns will look like once your state pension commences. 

A good starting point to understanding what your longer-term lifestyle would look like is to use cash flow modelling. 

This process will look at a projection of your assets, income, and expenditure over your lifetime and aims to assess the likelihood of you meeting your desired lifestyle every year considering inflation.

Now we have a clearer picture of how your existing income and assets can support your lifestyle, we can then start to consider whether traditional deposit accounts will be sufficient to support your needs or whether it's worthwhile considering investing a portion of your capital to give you the potential for higher returns than deposits have typically delivered.

You have stated that you wouldn't want anything 'too risky' and that is certainly a key consideration throughout our advice process. Investing your money can seem like a scary idea. It doesn't come with guarantees. 

There's a risk you might receive back less than you invest, and how your investment performs is not something you can control. 

It's very normal to feel this way at first about investing. That's why, at Skipton, we will only ever recommend an investment approach that you'd feel comfortable considering. 

We'll take the time to understand what you want to achieve with your money, help you work out your feelings to taking risk – and present options that match your needs.

We will also consider your tax position within our advice process and ensure any products recommend utilise any suitable available tax allowances such as your Isa allowance. 

Any interest or returns within an Isa are tax free and can offer valuable tax savings to help meet your short-term and longer-term objectives.

The most appropriate overall solution will very much depend on your views, needs and personal circumstances, therefore, the key is to get financial planning advice to determine what options are suitable for you and give you the best chance of achieving your objectives.

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