What to do if you receive a financial windfall?

Whatever shape your financial windfall takes it’s important to first take a breath.

While it’s easy to associate financial windfalls with positive news such as a bonus, investment returns or even a lottery win, it’s worth remembering that financial windfalls can also come as the result of loss in the form of an inheritance due to the passing of a loved one. In whatever situation a financial windfall comes about it’s likely to come with intense emotions.

Research shows that when we experience extreme levels of either joy or grief that these emotions can cloud our judgment and not only influence our decision-making but also affect the speed at which we make decisions. Taking a moment to step back and pause is always advisable to prevent you from making decisions that you may come to regret later on.

Once you’ve had time to fully understand the impact of the windfall you may be faced with questions and decisions around how best to use it. These decisions will vary with each individual for several reasons. For instance, your current financial situation, financial goals, lifestyle and more. Depending on the windfall amount, individuals may feel comfortable managing their own finances, while others may wish to hand this aspect over to a professional who can advise them accordingly.

Being intentional with your decisions and taking time to construct a long-term plan for investing, spending and possibly gifting will help ensure this stroke of luck not only brings you happiness and financial freedom in the short-term, but long into the future.

What is a financial windfall?

A financial windfall refers to a large amount of money that an individual comes into unexpectedly. They’re usually the result of a one-time event that’s out of the norm, although this isn’t always the case.

While the source of the financial windfall can differ, so can the amount of money that comes from the windfall. No ‘set’ amount of money constitutes a financial windfall, instead, the meaning of financial windfall is subjective to each individual. For the majority it’s seen as an increase in income which could be reflected in an additional £5,000 or £5million. Whatever the amount, windfalls offer a unique opportunity to improve your financial situation.

Types of financial windfall

Financial windfalls can come in many different forms as previously mentioned. Examples include:

  • A surprise employee bonus
  • A winning lottery ticket
  • An inheritance from the death of a family member
  • A life insurance payout
  • Profit from the sale of a home or second property
  • A tax refund
  • An unexpected gain from selling stocks or shares you own

Any sum of money you didn’t expect to receive that enables you do something you couldn’t do before without the money, can be considered a windfall.

What to do with an unexpected financial windfall?

However a financial windfall is received, it’s important to carefully manage this new financial situation – especially if it’s a life changing amount. It’s a time that can be fraught with temptation so remaining calm and thinking of the long-term benefits the financial windfall can provide is key.

When considering what to do with an unexpected financial windfall, the important thing is to tailor your plans for this newfound money to your unique priorities. A good place to start is:

Determine your tax liability

Depending on the nature of your financial windfall and where it’s come from will determine whether or not the income is taxable. It’s advisable to speak to a financial professional early on to help you establish this to ensure you set aside enough money to cover the bill. If you’re domiciled in the UK, you should also be aware of how your windfall could affect Inheritance Tax (IHT). Should your Estate exceed the £325,000 tax-free threshold (as of 2023/24), your family may be faced with a significant IHT bill.

Revisit your Estate plans

Anytime your financial situation changes, it’s highly advisable to revisit your Estate plans. A fresh look at certain documents should include reviewing your Will as you may wish to reconsider how your assets are distributed once you pass. A financial windfall may also present the opportunity for you to leave a donation to a chosen charity you wish to support. It’s also worth considering completing a Lasting Power of Attorney which is recommended regardless of your age to ensure your finances are managed as you wish should you become incapacitated.

Invest in your retirement

Whether your windfall comes early or later in life, it’s always worth investing in your retirement. Allocating a proportion of your windfall to your retirement funds early is not only wise but will allow you to grow your savings for when you need them.

Make a plan

Making a plan doesn’t mean you can’t have fun with your newfound wealth. Instead, it’ll leave you feeling confident and in control. In many cases, the amount and source of the financial windfall is likely to help guide your planning. Taking the time to reassess your goals and determine a robust financial plan will allow you to make the most of your money and benefit in the long term.

Need assistance managing a financial windfall?

It’s easy to get caught up with ideas of how to spend a financial windfall, however many forget that managing an unexpected financial windfall can also be overwhelming and quickly turn into a nightmare if you mismanage your wealth.

The larger the windfall, the greater the need to enlist help from legal and financial professionals. Consider speaking to financial experts that provide a holistic approach to financial planning covering tax and Estate planning. Not only will they be able to review your overall financial health but together they’ll discuss your personal and financial goals and present suggestions on how to maximise the potential of your windfall.