One of the most heartening letters a charity can receive is notification that they have received a substantial legacy. It means that somebody somewhere was impacted by their work and chose to remember them with a gift in their will and that their legacy marketing strategy is effective. Last year, over £2.5bn was given to charities as legacies and the amount is steadily rising, and with only 6% of the population leaving a bequest in their will there’s a lot further to go*. This growth in gifts in wills should open up opportunities for charities that in the past may not have been legacy recipients, and this comes with a lot of questions too.
The main question is, without a doubt, “what shall we do with this legacy?” Assuming the donor assigned no restrictions to how the money could be spent, the charity has a number of options to consider, often depending on the size and scope of the charity.
Going out and spending all the money on a flagship project, building or campaign is one option and may be tempting and exciting, but it is not always the wisest course of action, particularly for a small charity with little secured funding.
Unless there is a crucial project requiring the funds, keeping back a portion of the gift to boost cash reserves might be a more sensible move, and if the legacy is large enough any charity might want to seriously consider investing the money to supplement other sources of income going forward.
While investment income is not guaranteed, it is certainly greater than bank interest and more predictable than legacy income. Even a few extra thousand pounds of income each year may equate to introducing a brand-new service, fully funded indefinitely. Perhaps even more crucially, this investment income may plug an ongoing deficit in the accounts and help to maintain the existing services and keep the charity open.
There is sometimes a stigma associated with investing your donations rather than spending them all on specific charitable activities. News articles that criticise charities for not spending 100% of their donations certainly do not help either. They fail to understand that this would be impossible unless everyone in the charity sector worked for free and charities weren’t charged rent or bills! Planning for the future is also important and most of these articles do not take into account how unpredictable a lot of charitable income actually is.
A well written reserves policy that clearly explains why a charity is keeping some of its reserves invested is therefore key when it comes to explaining why some of the legacy income is being retained and invested. This is particularly important if the charity wants to apply for grant funding. For example, the investment portfolio might represent longer term reserves of the charity and might cover eventualities such as the cost of an emergency roof replacement, or the wind-up costs of the charity should it have to close. Holding money in reserve for these eventualities is sensible and if it can provide an income at the same time then even better. Producing income can also relieve some of the pressure upon other sources of revenue and help with cash-flow consistency.
A well-thought-out investment policy is also important to ensure that the way the reserves are invested fits the objectives of the charity. Issues like ethical investment, the balance between income and capital growth and time horizon will be included here and again will help to explain to a grant funder or member of the public why the charity is investing.
At Brewin Dolphin we work with a lot of charities that are investing for the first time. We will take the time to talk through all the topics to consider and the whole process with the Trustees, from helping with reserves and investment policies to ensuring they are fully aware of the risks associated with different investments, and putting it all together in a solution that fits their circumstances.
Associate Investment Manager
The value of investments and any income from them can fall and you may get back less than you invested.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.