Sometimes dreams do come true. Whether you’ve recently inherited a large lump sum, won the lottery or sold your stake in a successful company, you could suddenly find yourself with a windfall that’s larger than any financial sum you’ve ever handled before. Now what?
Before you do anything else, don’t panic. Don’t give up your job just yet, don’t start splashing the cash or invest in the next best scheme that comes your way. Buy a large bottle of champagne to celebrate, pinch yourself and take a few days or weeks for the reality to sink in.
A large sum of money can be a daunting thing, throwing up a whole new set of worries that you never thought existed. What about investments and tax? Should you buy a luxury property or a sports car? Give to family and friends, or charity? These may be nice problems to have but you are unlikely to be well equipped to deal with them on your own.
This is where shrewd legal and financial investment advice is highly recommended. Find a professional and experienced legal adviser an accountant or tax expert, or possibly all three depending whether you’ve come into £50k or £5 million. Make sure that you have confidence in your adviser(s) and reassure yourself of their best intentions and appropriate skill set by doing your own due diligence research.
Once you have assembled your team, you’re ready to start formulating the goals that will ultimately define your investment strategy.
- Take stock of your situation and make a plan
Take a deep breath and a long look at where you are in life and compare this situation to where you would ideally like to be. Plan 5, 10, 20 or 30 years into the future. Where would you like to live? Would you be working or retired? Devoted to your hobbies or running your own business? Travelling the world or looking after the grandchildren?
Write down your visions so that you have a clear picture of where you are headed, and so that your investments can support your life’s goals most effectively – and don’t leap into cash investments without fully considering all eventualities.
- Pay off any existing debts
Before you start investing, clear the decks and pay off any money you owe. Your windfall may be able to clear your credit card payments or bank overdrafts, or be sizeable enough to pay off your mortgage (check terms and conditions for punitive early redemption charges).
If you have to prioritise, the highest interest debts should be paid off first, saving you literally hundreds or thousands of pounds in interest payments.
- Set up an emergency fund
To protect yourself from unexpected costs or emergencies, it is prudent to set aside a moderate sum to create a rainy day fund that can be accessed with little or no notice. Look at this as a safety net in case you need cash quickly, unexpectedly lose your job or have a health issue.
As a rule of thumb, you should set aside the equivalent of 3 month’s income, or 3-6 months household expenses, depending on your particular circumstances.
- Think about the family
Before you put your money to work for you, spare a thought for your loved ones. You may want to help out family members with a lump sum or regular financial support, a property purchase, school fees, care home fees, etc.
Gifting money or setting up investments for children or other family members, whether you’re alive or in your Will, can be a tricky business that often has complicated tax implications. It is highly advised that you take professional legal and financial advice before making a commitment.
- Look at bank deposit rates
Now that you’re ready to think about investing your windfall, savings accounts may be your first port of call. It has to be said that with bank savings rates being what they are today, money saved here will lose value in real terms over time.
By all means compare the market, but if you are after inflation proof investment vehicles to not only protect but grow your new found wealth, keeping it all in the banks is not a wise decision.
- Use up your ISA allowance
ISAs are tax free accounts for your savings or investments – stocks and shares, cash and more. The current annual allowance that you can put into an ISA stands at £20,000. Obviously, investing at the beginning of the tax year will provide the maximum benefit.
What’s more, you could split your investment across the ISA allowances of your spouse and children aged 16+ too. In this way, a family with 2 17-year-old teenagers would be able to shelter a maximum of £80,000 from the tax man this tax year alone.
- Take out a pension plan
Private pensions are a tax efficient way to save. If you are in danger of having to pay tax on your windfall, consider a pension plan as an excellent way to claw back some of the tax you would have had to pay. Pension funds can also be used to pass on assets to your chosen beneficiaries, often tax free.
Once you’ve turned 55, you can take up to 25% of the value of your pension fund as a lump sum payment, free of tax.
- Buy property
If your mortgage has been redeemed and you have sufficient capital to invest in property, this can be a very good investment indeed. Whether you move to a bigger house or buy an investment property for letting out, you can look forward to capital growth and/or regular income.
The buy-to-let market has seen significant changes recently, with returns on investment being less attractive than they were a few years ago. While investment property can still be worthwhile, it is no longer the ‘golden goose’ it was once hailed to be.
- Consider long-term investment vehicles
If you are considering longer term investments into stocks and shares, proceed with caution and do your research. The stock market is not for the faint hearted, even if you play it safe with investment funds and ready made portfolios rather than putting your money into individual company shares.
For substantial stock market investments, it is highly recommended that you use an experienced investment manager to guide you through all the options, helping you to make an informed choice in line with your risk profile and investment goals.
- Donate to charity
You may feel that your windfall enables you to make a generous charitable donation. Giving to charity is tax efficient if you do it through Gift Aid, whereby the charity (and higher tax paying donor) is able to obtain 25% tax relief. Property and shares can be gifted to charity free of Capital Gains Tax.
Finally, if you leave 10% of your estate to charity in your Will, your heirs will benefit from a reduced Inheritance Tax Rate of 36% (as opposed to 40%) on the entire estate.