The term ‘financial windfall’ refers to a large amount of money that you come into ownership of unexpectedly. You may first attribute a financial windfall to positive news such as winning the lottery, achieving a bonus or healthy investment returns. However, it’s worth remembering that financial windfalls can also occur in difficult times such as receiving an inheritance due to a loved one passing away.
Due to the unexpected nature of a financial windfall, there can be a wide range of emotions at play. When emotions are running high, it can be difficult to know what to do next. Being intentional with your decisions and taking time to work with a financial planner can help you create a plan for preserving and growing your wealth. This can help to ensure your financial windfall not only brings you happiness and financial freedom in the short-term, but long into the future.
In this article we look at potential financial windfall scenarios and how to best manage these situations.
Financial windfall scenarios
There are many instances where you may come into a financial windfall, the most common being if you are the beneficiary of an inheritance from a loved one’s estate. There is also the possibility of receiving a life insurance payout if someone in your family has passed away and you are named on their policy. The grief felt during the death of a family member or friend can make it difficult to focus on the financial details and the long-term plan for this money. A financial planner can guide you through this difficult time and help you to put a plan in place for your new wealth.
Another complex time to receive a financial windfall is a payout from a lawsuit or settlement agreement. This may also come at a time of heightened stress and anxiety, which can impact your decision making. Again, speaking with a trusted financial planner can help you to assess your current needs and develop a longer-term plan for this wealth, especially if you want to take a break in your career after a settlement agreement.
More positive instances of financial windfalls may be receiving an employee bonus, making a profit on the sale of a property, business or company shares, and lastly a lottery win or cash prize. These high, positive emotions can also impact your decision making, and in these circumstances, you may benefit from more experienced advice.
Evaluate your financial plan
When you receive a financial windfall, no matter the circumstances, you should start by evaluating your financial plan with a planner. They can help you to assess your current financial situation and guide you through the best ways to preserve or capitalise on your windfall. You may first want to consider paying off any debts, top up your emergency cash fund or increase life insurance policies for better coverage. When receiving a financial windfall, it is very important not to rush your decision, ensuring you put your goals and needs as priority.
Put safety nets in place
Another safety net you can put in place to protect your financial windfall is to update or write a new Will. This will help to ensure your wealth is passed on to the beneficiaries of your choosing when the time comes. It’s also worth considering putting a Lasting Power of Attorney in place to ensure your finances are managed as you wish should you become incapacitated.
Making gifts with your windfall
Making gifts to loved ones during your lifetime is another option to preserving your windfall for the next generation. The money from your financial windfall could potentially help your children or grandchildren onto the property ladder or pay for further education. If your children are looking to start a new business venture, you could invest in this opportunity and give them the financial leg up they need to start their career journey. You can give financial gifts to family members either directly or via trusts, and you can find more information about financial gifting in our blog post.
Boost your investments
Next, you might consider using your financial windfall to buy a holiday home or boost your investments whether you are retired already or hoping to retire earlier than expected. You could make ad-hoc lump sum contributions to your pension and capture valuable tax relief, fully utilise your ISA allowances and/or consider other long-term financial investments which may be beneficial to you or your family.
Your dedicated financial planner will help to advise you on how to make informed decisions about your money so you can meet your needs and goals and ultimately make the most of this precious opportunity.
Tax payable on a financial windfall
One thing to bear in mind when receiving a financial windfall is the potential tax you will have to pay. Depending on where the windfall has come from will determine whether the money is taxable now or in the future. It is prudent to speak to a financial planner as early as possible to establish how much of your financial windfall needs to be set aside to cover a potential tax liability.
It is advisable to speak with a financial planner if you are in receipt of a financial windfall, and the larger the payment the greater the need for specialist financial and legal advice. Together, they will be able to review your wider financial situation, structure your goals for the future, and help you to maximise the potential of your windfall.
If you would like to speak to our team of financial planners and legal advisers, please do get in touch.
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Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
Past performance is no guarantee of future performance.
The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.
