How to invest lottery winnings

Table of contents:

• 1. MUM'S THE WORD
• 2. TAKE SOME TIME TO THINK
• 3. FAIL TO PLAN AND PLAN TO FAIL
• 4. LOOK TO THE EXPERTS
• 5. SORT OUT YOUR ESTATE PLAN
• 6. DON'T FORGET THE TAXMAN
• 7. CONSIDER THE LONG GAME

 

Here are seven ways to responsibly deal with an unexpected windfall.

1. Mum's the word

The first thing you need to do is decide whether you want to make your good fortune public knowledge.

If friends and family catch wind of your newfound wealth, you may find people suddenly coming out of the woodwork – and they all will have their hand out.

But being over generous or too charitable can be one of the quickest ways to lose your newfound wealth.

While it might be difficult to hide your new lifestyle from those you know, it may be worth creating a ‘cover story’ if necessary and never share precise details of the amounts of money involved.

2. Take some time to think

The old proverb, ‘The art is not in making money, but in keeping it,’ seems to ring true for many people who receive a huge windfall.

But because of the unexpected way that you came into the cash, whether a lottery win, a bonus or an inheritance, it is easy to think differently about the lump sum compared to how you view the money you have worked hard to earn.

So, it is crucial that you do not get carried away with the luxury lifestyle your new wealth affords, but to take stock and plan.

Here it might be a good idea to stash your money away into an easy access savings account for six months or so.

The interest available won't be the highest available, but it will give you time before you are in the frame of mind to make a sensible financial plan. 

Find a savings account for your needs at SavingsChampion.co.uk.

Bear in mind that the current Financial Services Compensation Scheme (FSCS) protection limit is currently £85,000 per individual per banking institution or £170,000 per joint account, so you may need to consider more than one institution to maximise this protection. 

However, the FSCS protects temporary high balances in your bank account of up to £1million for up to twelve months due to certain life events such as an inheritance.

The protection begins from the date the temporary high balance is credited to your account. You don't need to tell us if you have a balance higher than £85,000.

3. Fail to plan and plan to fail

Rather than making a ‘shopping list’ of what you’d like to do with your newfound wealth, you need to work out your ultimate financial end goal and consider the trade-offs this might entail.

You might want to buy a house straight away, but also pay for private education for your children in the future, for instance – and, depending on the size of the windfall, you may need a detailed plan to do both.

Always keep in mind the true cost of a potential purchase before you splash out.

You know that country pile that you have always dreamt about and now you can actually afford? A sizable property will require costly upkeep which could have a massive impact of that on your cashflow – so do the sums in advance.

Plenty of asset-rich people have been caught out by this and end up having to sell up to avoid going under.

4. Look to the experts

You seldom hear a rich person talk about their spending, more often it is their investments that they focus on.

With this extra money at fingertips, if you play your cards right, you could generate even more by investing your cash.

But, for many inexperienced investors, the thought of playing the stock market or drawing up a financial plan makes them nervous, so, it’s best to seek professional help.

“To successfully grow such a sum of money takes a diverse skillset, not to mention knowledge of tax matters, property laws and an understanding of economics,” says Qiaojia Li, chief executive of Rosecut, the wealth managers.

For instance, you might be surprised to learn some experts say that paying off your mortgage in one go is not always the best idea in terms of growing your finances.

“You need to decide based on your current rate of interest,” explains Li.

“If you are on a fixed interest rate below 2%, the current UK inflation target, you might be better off investing your windfall and using the year-on-year return (which is 7% long term average invested in the financial markets) to gradually pay off your mortgage,” she says.

To get the advice you need, Unbiased.co.uk to find an independent financial adviser.

5. Sort out your estate plan

Coming into a large lump sum should certainly give you a nudge to consider your current estate plan or, if you do not already have one, to put one in place.

It may be a chore that you would prefer to put off, especially when you are still celebrating your new financial security, but the sooner it's done the better.

While you may have been happy for your children to inherit a few thousand pounds, for instance, when they reached 18, you may feel very differently about them inheriting a lot more.

One option is to stagger payments, perhaps up to the age of 25 or even 30 and to placing assets into one or more trusts.

If you need to find a lawyer to complete your will, Find A Solicitor is a free service from The Law Society for anyone looking for legal services in England and Wales that are regulated by the SRA.

6. Don't forget the taxman

Tax implications vary depending on the type of windfall you’ve received.

When it comes to an inheritance, for instance, tax is currently levied at a rate of 40pc on the value of an estate above the tax-free threshold, which is £325,000 per person.

Married couples and civil partners are exempt from inheritance tax.

On top of this, your partner's inheritance tax allowance rises by the proportion of your allowance that you didn't use, meaning together a couple can currently leave £1 million tax-free.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000.

When it comes to the lottery, this money is treated like gambling wins and as such payments are tax-free.

However, once the payment has been made any interest or income generated from the capital, this will be subject to income tax at your highest marginal rate.

What’s more, if you give away some of your winnings and die within seven years, the lucky beneficiaries might be subject to inheritance tax and face a hefty, unexpected bill.

If you’ve come into your money by selling an asset that has increased in value – shares, for example – you may have to pay capital gains tax (CGT).

To find out more on CGT visit https://www.gov.uk/browse/tax/capital-gains.

7. Consider the long game

It can be tempting to spend an unexpected windfall on something short-term, a sportscar or a luxury holiday, for instance, but if you don’t have much in the way of savings for your retirement, you should consider ploughing some of that money into your pension pot.

Find out how much you can squirrel away for retirement with The Pensions Advisory Service.

All in all, think before spending! As exciting as the surprise can be, it is worth to think smart, take control of the money and make a great plan to spend or invest your lottery winnings.