I’m 70 and just received a £200,000 inheritance: should I save it or invest it?

I’m 70 and recently inherited £200,000 – but wondering what on earth to do with all the money.

I currently depend on income from my retirement as well as savings and investments that I hold within an ISA.

This gives me about € 40,000 in income per year. I live alone and no longer have a mortgage on my house.

So I’m relatively comfortable, but like most people I’m trying to be more frugal as my daily expenses have increased.

The £200,000 is currently in my bank’s savings account earning 3 per cent interest and I can access it as and when I please.

I’m a little nervous about investing the money at this stage of my life. However, I would like to be able to use it as a source of income for years to come, so a solid return would be welcome.

I wanted to see if you have any advice on what someone in my position should do. Do you recommend safe investments that generate income, or are there particular savings accounts I should consider? Or should I consider a completely different approach. Via email

Ed Magnus of This is Money replies: You have a strong financial position. Considering you’re mortgage-free with an annual income of £40,000, this £200,000 windfall is a nice problem to have.

Investing often becomes less attractive as you get older. However, at age 70 there is no reason to consider yourself ‘too old’ to invest.

Keeping money in savings can be tempting right now, especially given that the savings rate has reached a level not seen since 2008.

The main problem for savers at the moment, however, is the crumbling force of inflation.

For more than two years, no savings account has managed to match or exceed inflation, meaning savers have become poorer in real terms.

That said, things may be about to change. Inflation fell to 7.9 percent in the 12 months to June and is expected to fall further in the coming months.

If you’re going to keep some of your money in a savings account, make sure you’re earning the highest possible interest rate.

While the 3 percent rate you’re currently using isn’t terrible by any means, it falls far short of the best easily accessible deals on the market.

The most accessible savings accounts are offered by Secure Trust Bank, Charter Savings Bank and Oxbury Bank. All three pay 4.55 per cent and come with FSCS protection up to £85,000.

Paragon Bank also offers a dual access account and pays 4.6 percent. However, the rate on this account drops to 1.5 percent if three or more withdrawals are made within a 12-month period.

If you’re willing to have no access to your money for a year or more, Fixed Savings Deals pay an even better interest rate. The best one-year fix pays 6.05 percent, courtesy of Atom Bank.

We decided to ask three experts for advice: Helen Morrisseyhead of pension analysis, Hargreaves Lansdown, David Henryinvestment manager at Quilter Cheviot and Lawrence Bradypartner and financial planner at Saltus.

Should they save or invest?

Helen Morrissey replies: It is important to keep cash on hand for emergencies.

Keeping your money in a savings account will keep it safe in the sense that you can access it whenever you need it.

However, as we all experience, the purchasing power of your money will decrease as prices rise – as it is not safe from the effects of inflation.

History tells us that investing in the stock market is the best way to grow your capital over time, so that it at least keeps pace with inflation.

You should be comfortable with the ups and downs and have a long term vision.

My suggestion would be to invest half the money, so £100,000, and use a mix of tracker funds to keep costs down.

If you’re not already using your Isa credit, you can shield £20,000 a year of this money from tax.

For the remaining £100,000 you can shop around and use a combination of easy access and fixed term accounts to improve the rate you are currently receiving.

It is possible to earn more than 4 percent for easy access and more than 6 percent for certain time.

A cash savings platform offers a slew of options all in one place without having to trudge up and down the high street.

Again, I’d split your money 50/50 between easy access and a fixed term.

Lawrence Brady adds: With savings rates still relatively low and inflation at 7.5 to 8 percent, holding cash is losing money in real terms.

For the reader to be able to use the money as a source of income, investing for the longer term offers the best chance to mitigate the impact of inflation.

Ideally, they would hold income on deposit for at least a year and then have either a combination of invested positions and some time deposits to increase potential profits.

Ultimately, a balance of cash and invested resources will strengthen the position and help improve the sustainability potential of the capital.

What should they invest in?

David Henry replies: I would first recommend that you invest part of this £200,000 in a diversified basket of global equities.

Within this allocation, you can also include a specialized equity income fund that will focus more on companies that pay higher dividends – income that can be returned to you as the end investor.

Artemis Income is a solid offering in this space, with a portfolio of stocks that screen cheaper than the broad UK market.

You may also want to look into the Premier Miton Monthly Income fund, managed by Emma Mogford, which offers a robust and repeatable process and (as the name suggests) pays monthly dividend income to investors.

There is, I think, more good news for you. For investors like you who don’t want to take on a lot of risk, bonds now offer an alternative to the stock market for those looking for a decent income.

That was not the case just two years ago. You don’t necessarily have to run extra risk by lending money to companies and buying corporate bonds. Gilts offer very good yields compared to recent history, especially shorter-term gilts.

The iShares 0-5 Gilt ETF would give you exposure to this asset at a very low cost (0.07 percent per annum).

How can they minimize their tax bill?

Lawrence Brady replies: Ensuring that the money is invested in a tax efficient manner is also an important factor in prolonging the ability to generate an income.

ISAs are a great tax-efficient tool because profits remain tax-free. A good starting point is to build stakes in shares of Isa (I assume current Isa is held as cash).

Cash ISAs can be converted into an investment ISA without affecting your annual ISA fee.

However, ISAs are limited to an input of £20,000 per annum, so to avoid paying tax on interest accrued outside the ISA, it’s worth spreading the money across a number of tax-friendly products.

Premium Bonds are easily accessible online and backed by HM Treasury. The annual prize money percentage is currently 4 per cent and is tax free, with prizes of up to £1 million available.

They may also consider a General Investment Account, as withdrawals are not subject to income tax. While any gains on sale are subject to capital gains tax, the CGT deduction is £6,000 and, at 10 per cent, the CGT payable thereafter is less than the income tax.

Taking advantage of other tax deductions such as dividend payments and tax-free money within pensions is also an effective way to make up for an income shortfall without paying unnecessary taxes.

For example, the individual could still make a pension contribution of up to £60,000 per tax year and benefit from tax relief – then draw on these assets to generate further income (25 per cent are tax-free).

After the age of 75 there are no more tax deductions, so there is time to build up some reasonable assets in addition to the existing pensions.

Pensions are also exempt from inheritance tax, and annuity rates have recently become a lot more attractive, so another consideration would be to look at what income this could bring based on existing health and their views on death benefits.

One last piece of advice?

David Henry replies: My general advice would be to put aside all the money you would have to spend over the next year from this £200,000 and save that in cash.

Take the rest and invest anywhere from a third to a half of this amount in wisely diversified equity funds, as I’ve described – and invest the rest in government bonds. You don’t need anything more complicated than this – keep it simple.

Finally, it is difficult for me to comment too specifically given what little I know about your situation. However, it seems that you were in a solid financial position before you received this inheritance, so my advice would be not to feel that you have to live too frugally.

If you have to spend money on something that is a need, or a real want, don’t necessarily feel the need to deprive yourself.

If you are not sure how much you can spend annually, a good financial advisor can help you.