What to do with a windfall

What to do with a windfall
shutterstock_PrinceHarry.jpg

An inheritance from Princess Diana is set to make Prince Harry - already one of the world’s most eligible bachelors -  a multi-millionaire when he turns 30 on September 15th: “After inheritance tax the estimated £10.7m residue, with sensible management, could generate a £320,000 annual income,” says Danny Cox at Hargreaves Lansdown.

When it comes to us lesser mortals, a big lottery scoop, Premium Bond win or large inheritance may be a rarity; however the same saving and investing advice would apply to anyone coming into a sizeable chunk of money.

Here are Danny’s top tips:

  1. Take your time: Decisions made in haste may be regretted later. Bank your windfall in a high-interest cash account and take your time. This windfall might be the catalyst to change careers, take a sabbatical, set up a business - or perhaps retire. Until your plans are clear, keep cash flexible. 
  2. Plan ahead: Naturally you will want to help out family, friends and charities. Before starting to make gifts, consider how much of your windfall you plan to spend and how much will be needed for your own longer-term financial security. It’s far easier giving away more in the future, than to ask for it back!
  3. Repay debt: Paying down debt is one of the best investments you can make. Rarely is it a good idea to hold onto debt, even a low-cost mortgage.
  4. Build savings: Cash is important to meet short-term expenditure and provide an emergency fund. However, cash savings rarely keep pace with the rate of inflation. Therefore you should hold cash-  but not too much - and invest the rest for long-term inflation-beating returns.
  5. Save and invest tax efficiently: For longer-term investments, NISAs should be one of your first considerations. On most investments you pay tax; ISAs are different. Within an ISA you pay no capital gains tax and no further tax on the income. Less tax means higher returns for you. By using your ISA allowance every year you can build a substantial portfolio of tax-sheltered assets. This tax year you can save and invest up to £15,000 in either a Cash NISA or Stocks & Shares NISAs or any combination of the two (the tax year runs from 6 April 2014 to 5 April 2015). A couple can shelter £30,000.
  6. Boost retirement cash: Now may be the right time to boost your pension funding. The maximum which can be paid into pension and receive tax relief, is usually 100% of earnings, subject to an overall cap of £40,000. Non-earners can invest up to £3,600 into pension and benefit from tax relief. Also review any existing pensions to ensure they are working hard for you. If you're aged over 55 you may decide to take advantage of the new pension freedoms for April 2015, which give the option to take your whole pension in one go. The majority of your pension pot will be taxable so now is a good time to start planning ahead.
  7. Review protection arrangements: Now you're in receipt of a windfall, you may not need all of your life and health insurance policies. Before cancelling any of these, review what type and how much insurance protection you need and whether your existing policies could be used for other purposes, such as inheritance-tax planning.
  8. Update your will and LPA: A professionally-drawn will is the only way in which you can be sure those people whom you wish to benefit from your estate will do so. Also, those over 50 should consider appointing a Lasting Power of Attorney (LPA). This makes life easier if you are unable to look after your affairs. An LPA appoints someone of your choice to help out rather than leaving it to the Court of Protection to decide.
  9. Inheritance-tax planning: Most investors tackle inheritance tax planning (IHT) once they’ve retired however this may need to be addressed earlier depending upon circumstances. There are easy ways to reduce the amount of tax paid, but there are also pitfalls. For example, some gifts you make may not be free from inheritance tax for seven years.
  10. Get advice: If you're unsure of the best course of action, seek professional advice from a fee-based independent financial adviser. He or she will be able to put firm financial planning foundations in place and bring in other experts to help you where necessary.

Happy Birthday Prince Harry!

There’s more money-saving advice in every issue of Yours magazine, out every fortnight on a Tuesday.