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It can be difficult to decide what to do when a large amount of money unexpectedly comes your way. Perhaps a relative suddenly dies and leaves you an inheritance lump sum worth tens of thousands of pounds. Or, maybe your self-employed business has picked up and led to a large fortune in a short space of time. Whilst some will be tempted to commit the money to a luxury purchase (e.g. a new sports car), others will be keen to explore ways to invest it towards their future. In this article, our financial planners here at Cedar House offer some ideas below about how you might achieve this.
We hope you find this content helpful. If you find yourself in this position (i.e. the recipient of a windfall), then consider seeking professional financial advice to explore the best options open to you. Feel free to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or email@example.com
Idea 1: the pension boost
If you have a longer investment horizon in front of you (e.g. 10+ years), then it may be a good idea to think about ways to commit the windfall to your pension. Today in 2020, many people are not saving enough towards their retirement and so this could be a good opportunity to boost your future retirement lifestyle. In 2020-21, you are allowed to contribute up to £40,000 per tax year into your pension pot – or 100% of your earnings (whichever is lower).
In addition, you can also contribute any unused allowance from the previous three year years. So, suppose you could have contributed £40,000 in 2019-20 but only committed £20,000. In the current year (i.e. 2020-21) you could, therefore, put up to £60,000 into your pension. However, bear in mind that putting a lump sum into your pension all at once does have its risks. If you put in the money and the markets suddenly plummet, for example, then this could disproportionately affect your investment growth. Speak to your financial adviser about whether there may be other ways to invest the money (e.g. pound-cost averaging) which better suit your risk profile.
Idea 2: pay off debts
If you have a large credit card debt, personal loan or other high-interest debt eating into your monthly income, then a windfall could be the perfect opportunity to address some/all of these. In 2020, many banks charge 20% APR or more on credit cards, which far exceeds the returns you might expect to generate from equities and other higher-risk investments. As such, it usually makes sense to pay these off first before considering ways to commit a windfall to a portfolio.
Idea 3: overpay the mortgage
For most people their mortgage is their largest expense, possibly comprising thousands of pounds each month. The thought of seeing these payments greatly reduced or even eliminated can be hugely liberating. Here, a windfall could go a long way towards helping you repay your mortgage early or even completely (if the sum is large enough). Imagine, for instance, that you have a £100,000 mortgage to pay over the next 25 years. After this time you would be free of the loan and would have paid £27,179 in interest. However, suppose you used a windfall for a £20,000 one-off overpayment (assuming your lender allows you to do this). In this case, you could pay off the mortgage 6 years early – saving over £30,000 in mortgage payments as well as over £11,000 in interest.
Idea 4: emergency fund top-up
Here at Cedar House we usually recommend that most people try to build at least 3-6 months of emergency, easy-access savings. This can bring huge financial stability if you lose your job or if you suddenly need to make a large, unexpected payment (e.g. a boiler replacement or a flight to visit a dying relative). A windfall can be a good way to provide an extra buffer to these savings. Again, here it can help to seek independent financial advice since cash may not always be the best way to hold the capital. For instance, perhaps you could put some of it into NS&I Premium Bonds which opens up the chance to win a £1 million jackpot (tax-free). One of the big benefits is that you can cash in at any time. However, this kind of investment will likely not be suitable for everyone. Bear in mind that NS&I Premium Bonds do not offer guaranteed returns or protection against inflation. Nor do they provide a regular income.
Conclusion & invitation
These are just some of the many possible ways to commit a windfall. Of course, it can also be a perfectly reasonable choice to commit some/all of it towards something more luxurious. Here at Cedar House, our suggestion is to consider such a spend once the ideas we’ve offered above have been carefully considered.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or firstname.lastname@example.org