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What should you do with a windfall?

Written by: Emma Lunn
Suddenly receiving a large sum of money and not knowing what to do with it is a nice problem to have.

Whether you win the lottery, the Premium Bonds jackpot, or receive an inheritance or large bonus, it pays to take your time before deciding what to do with the money.

Typical responses to a windfall might include paying off your mortgage, quitting your job, moving house, booking an expensive holiday, or giving money away to charity.

But for many people, a financial adviser should be your first port of call.

NS&I announced this week that it was giving £1m jackpot winners more choice of financial advisers. Previously it suggested a single firm.

Only two people a month win the £1m Premium Bonds jackpot, but a much higher number will receive a windfall elsewhere. A survey by Hargreaves Lansdown found that 21% of people expect to receive a significant inheritance, while 14% have already received one.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Most of us already know how we’d like to spend a £1m Premium Bond win. In reality, however, while it’s an incredibly nice problem to have, if we actually won the money, it would prove far more difficult to work out the best way to use it. NS&I currently suggests people consider taking advice, and from April, it will direct people towards 8,000 potential advisers.”

What to do with a windfall

If a windfall is going to improve the rest of your life, you need to think carefully about what you want to achieve. This means being realistic from the outset. It’s important not to rush into anything, especially big purchases.

  • What are your priorities?

It’s important to prioritise what you want the money to do for you. There may be specific things you want to buy, such as a property. Alternatively, you might prefer to change your life, perhaps by cutting back your working hours, changing careers, or retiring early.

If you have children, you might want to help them get on the property ladder. You can’t necessarily afford to do everything, so work out what’s most important.

  • Pay off debts

It almost always makes sense to pay off existing debts with a windfall. Hargreaves Lansdown found that 20% of people who have received a significant inheritance paid off the mortgage and 10% paid off other debts.

  • Don’t just leave it all in the bank

Hargreaves Lansdown also found that 43% of people who receive a significant inheritance put it into a savings account. Although this might seem like a sensible move, leaving your money as cash will mean losing money in real terms over time due to inflation.

Ideally, you should keep an emergency buffer in an easy access savings account, and cash you plan to spend over the next five years in savings accounts fixed for the relevant periods.

  • Consider stock market investments

For the rest of your money, over the long term, you need to at least consider stock market-based investments. Hargreaves Lansdown found that 16% of people have done this with their inheritance.

A stocks and shares ISA is a good place to start – you can save £20,000 a year in an ISA, with the returns tax-free. You should also think about starting, or adding to, a pension. Pensions also invest in the stock market and benefit from certain tax advantages.

  • Take financial advice

If you receive a windfall, it may well be one of the times in life when it’s worth paying for financial advice. You may not be able to achieve your wildest dreams with a windfall, but this should give you the best possible chance of making a real difference to your quality of life.

A financial adviser will be able to advise you on long-term projections, tax efficiencies, and how to invest your money in line with your attitude to risk.

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