How to manage a life-changing windfall

Perhaps the first thing to do after receiving a life-changing windfall is to take some time to consider how you want to use your money. You can allow yourself an immediate purchase, but it could be quite a shock to receive a large sum, and you should take some time to adjust.

Depending on the nature of the windfall, you might also be vulnerable to immediate requests from friends, family, or good causes, eager to have your attention. That’s understandable, but all in good time.

While it makes sense to pay off your mortgage or clear any outstanding debts, the real opportunities come once you’ve taken care of the “essentials” and you can start thinking about the new life you want to live.

Depending on the exact size of the windfall, the possibilities could be endless.

You could stop working, start a business, volunteer, set up a charity, travel the world, upsize, buy more property, invest in antiques, buy a racehorse, buy some land – the world really is your oyster!

Whatever you choose to do with your windfall, you’ll need a plan and a team around you to manage it on your behalf.

If you’re setting up trusts, you’ll need a good solicitor. If you’re starting a new business venture, you’ll need a reliable accountant. You’ll also need an independent financial planner to create a bespoke financial plan that translates how your change in circumstances can be maximised to deliver the life you can now live.

It can be tempting to make impulsive purchases or chase status symbols, but long-term satisfaction often comes from making decisions based on what truly matters to you, whether that’s security, family, freedom, or adventure. Your team will get to know what makes you tick and will work to make sure your new money delivers this for you.

You may also want to use part of your windfall to support causes you care about or help the people you love. While your motivation to do this is likely altruistic, thoughtful giving can also come with financial advantages if managed strategically.

For example, giving financial gifts to loved ones can offer them immediate and meaningful support while also reducing the size of your estate and potentially lowering future Inheritance Tax (IHT) liabilities.

If you’re hesitant about giving large sums outright, you could consider setting up a trust. This allows you to specify how and when the money can be used, giving you greater control and peace of mind while still supporting your beneficiaries.

You might also consider donating a portion of your windfall to charity. Donating through Gift Aid means the charity can claim an extra 25p for every £1 you give, at no extra cost to you. And, if you’re a higher- or additional-rate taxpayer, you may be able to claim a further 20% or 25% tax relief yourself.

Furthermore, if you leave at least 10% of your net estate to charity in your will, the rate of IHT on the rest of your estate could be reduced from 40% to 36%, potentially increasing the amount your other beneficiaries receive.

So, it’s important to manage your gifts and donations strategically to help ensure the value of what you give, along with any potential financial benefits, are fully maximised. A financial planner can help you create a plan that does exactly that.

Aside from any immediate purchases, gifts, donations, or mortgage repayments, much of your windfall will need to be managed with a long-term perspective to ensure it continues to deliver lasting benefits.

One of the biggest threats to the value of your money is inflation. Left alone, cash savings can steadily lose their purchasing power over time.

The stock market has historically offered better chances of outpacing inflation and growing wealth over the long term than cash.

For example, a study by Schroders found there was a 91% probability of UK equities outperforming cash over any 10-year period in the 123 years up to 2023. Over two, three, four, and five-year periods, the probability was 70% or above.

Depending on your appetite for risk, a large windfall could give you the opportunity to be a bit more adventurous when it comes to investing for longer-term growth.

Venture Capital Trusts (VCTs), for example, are investment vehicles that let you own the shares of young and innovative smaller companies that aren’t listed on the main UK stock markets. Not only do these types of investments have higher growth potential, but they also offer tax incentives.

With a VCT, you can invest up to £200,000 in a single tax year and claim up to 30% income tax relief against the amount you invest, provided you hold onto the investment for at least five years. Also, any growth in the value of your investment is tax-free, including any dividends the VCT pays out.

However, it’s important to note that VCTs are high-risk investments, and because the shares aren’t publicly traded, they can be difficult to sell.

Ultimately, thoughtful long-term planning and a diversified investment strategy can help ensure your windfall supports your current needs, future goals, and long-term financial security.

A financial planner can help you create a diversified investment plan based on your risk tolerance and goals that ensures your windfall grows over time.