Receiving wealth, whether it’s an inheritance dictated by a loved one’s will or a sudden windfall such as a lottery win or sizeable bonus, can throw even the most financially aware amongst us into a state of panic.
The average inheritance is £11,000, according to the Office for National Statistics, but most of us awaiting an inheritance can expect to receive a much higher figure than this.
What do I do with the money? How do I spend it – if at all? These are probably the biggest questions running through your mind if you’ve received money you weren’t expecting either so soon or at all. We look at some important considerations when it comes to handling your money.
Take your time to plan
What you choose to do with your money will depend on your individual circumstances and the amount you receive. Usually, receiving a generous inheritance is the result of losing a loved one, so it can be a particularly difficult time and rushed decisions could lead to trouble later on. Therefore, it’s important to take your time when deciding on what you want to do next.
Splashing out on a vintage car, a dream boat or the trip of a lifetime might seem tempting, but probably won’t be the most financially sound decision. Spreading your inheritance or windfall to last, say, over your lifetime, will help to make sure the money is still providing for you in years to come.
Consider the tax implications
Inheritance tax (IHT) is a sticking point for many beneficiaries because if not planned for, it can make a serious dent in your inheritance. Gifting to help out loved ones is one option to keep your IHT liability at bay (depending on how much you inherit and whether it affects your nil-rate threshold).
Your inheritance or windfall could even be property, artwork or other high-value collectibles, such as a vintage car. If you decide to sell any of these assets, you may have to pay capital gains tax (CGT) on the proceeds from the sale.
While employment bonuses are taxed, lottery winnings aren’t considered income so they’re tax-free. However, as soon as you bank your winnings, you will have to pay income tax on the interest earned. IHT will also kick in if your winnings push your estate above the current £325,000 threshold.
Reassess any debts
Using your inheritance or windfall to clear debts such as credit cards or your mortgage could help provide some financial clarity. The approach that will be most suitable to you will depend on your personal circumstances and mortgage agreement, so it’s important to check with your provider before taking any action.
Invest, utilise tax-free allowances and boost your pension
You can make the most of the £20,000 annual tax-free ISA allowance, or choose to invest your money wisely in the stock market. You could also use your windfall or inheritance to invest in a pension to help boost your retirement savings while making the most of pension tax relief. If you’re already retired, your new gains could help to boost your existing pension pot – something an expert can help you to understand better if it applies to you.
The value of investments may go down as well as up. Positive performance is not guaranteed.
Get the right help
Getting the right guidance and advice at the right time is crucial when it comes to handling unexpected wealth. Speaking to a qualified and experienced financial adviser could help provide some clarity and direction, and help you to find a solution that will suit your individual circumstances.