Receiving a large sum of money, whether from an inheritance, selling a property, downsizing or even a lottery win, can be life changing. However, without careful planning, it’s easy for a financial windfall to be mismanaged. Here’s how to make the most of your newfound wealth while securing your financial future.
Take a Step Back and Assess Your Situation
It can be tempting to make quick decisions when you suddenly come into money. However, taking a step back is crucial. Before making any major financial moves, consider:
- Your current financial situation
- Any outstanding debts
- Your long-term financial goals
- Possible tax implications
Avoid rushing into investments or spending sprees before fully understanding your options.
Pay Off High-Interest Debt
One of the smartest ways to use a financial windfall is to clear high-interest debts, such as credit cards, personal loans or car finance. Reducing or eliminating debt improves your financial health and frees up money that would have gone towards interest payments.
Consider Tax Implications
A sudden influx of cash may have tax consequences. For instance:
- Inheritance Tax (IHT): If you receive money from an estate, check whether IHT applies.
- Capital Gains Tax (CGT): Selling property or investments may trigger CGT liabilities.
- Income Tax: Certain sources of windfalls, like lottery winnings, are tax-free but any interest earned is subject to tax.
Speaking with a financial adviser, like us, can help you navigate potential tax burdens and ensure compliance with HMRC regulations.
Invest Wisely for Long-Term Growth
Rather than leaving large sums of money in low-interest savings accounts, consider investment options that align with your risk tolerance and financial goals, such as:
- ISAs: Maximise your tax-efficient savings with Stocks and Shares or Cash ISAs.
- Pensions: Making additional contributions can boost retirement savings and offer tax benefits.
- Property: Buying a rental property or paying off your mortgage can provide financial security.
- Stocks and Bonds: Diversifying your portfolio can help grow your wealth over time.
We can help tailor an investment strategy suited to your circumstances.
Build an Emergency Fund
If you don’t already have one, set aside a portion of your windfall in an easy-access savings account. A good rule of thumb is to have at least 3-6 months’ worth of living expenses saved to cover unexpected costs such as medical bills, job loss or home repairs.
Plan for Your Future
Large windfalls provide an opportunity to secure your financial future. Consider:
- Retirement Planning: Boost your pension contributions to enjoy a comfortable retirement.
- Estate Planning: Update your will and consider inheritance planning for your loved ones.
- Gifting to Family: Use tax-efficient methods, such as gifting within HMRC’s annual allowance, to help family members financially.
Treat Yourself but responsibly
While it’s wise to be financially prudent, it’s also okay to enjoy some of your windfall. Set aside a small portion for personal enjoyment, whether it’s a holiday, a new car, or a home renovation without compromising your financial security.
Coming into a large amount of money presents both opportunities and challenges. Thoughtful planning, professional advice and smart financial decisions can ensure that your windfall benefits you in the long-term rather than becoming a short-lived luxury. If you are unsure where to start, speaking to us, as financial advisers, can help you make the most of your newfound wealth.
*Please note: A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
The Financial Conduct Authority does not regulate tax and estate planning.