5 important considerations to make when you receive an unexpected windfall

Category: Australia & News

In June 2023, the world mourned the loss of the renowned American author, Cormac McCarthy, who passed away at the age of 89.

Among many notable works, one of his most famous books is No Country for Old Men, a gritty thriller that explores morality, greed, and consequence. In McCarthy’s seminal novel, the central character finds $2 million in cash at the site of a botched illicit deal on the Texas-Mexico border.

Since the protagonist believes his presence went unnoticed, he claims the money for himself. Though, this perhaps wasn’t the best decision, as he unknowingly sets off a devastating chain of events.

While the book examines some of the darker aspects of the human condition, it’s interesting to consider how you personally would handle a sizeable, unexpected windfall.

Whether it comes from an inheritance or a lottery win, receiving a considerable windfall requires careful consideration if you’re to avoid some common pitfalls.

So, continue reading to discover five significant considerations worth keeping in mind when you come into a substantial windfall.

1. Stop and think before you make any impulsive purchases

When you suddenly receive a considerable windfall, it’s easy to be tempted into indulging in some luxury purchases.

Though, it’s worth resisting this urge, stepping back for a moment, and taking the time to consider the best use for your new-found wealth. Instead, carefully evaluate your options so you can make informed decisions.

It could be useful to draw up a list of what you might wish to spend your windfall on, such as a new car, a gift to your family, or even an early retirement. Then, build a clear picture of your short, medium and long-term goals.

By doing so, you could adequately prioritise your financial milestones and determine the best use for your sudden windfall.

2. Assess how your windfall may have changed your financial plans

After receiving a sizeable sum of money, there’s a chance this may have accelerated your progress towards your financial milestones. So, it may be worth reviewing almost all aspects of your financial plans to see how your windfall could help you work towards your goals.

For instance, if you’re building a fund for your retirement, you may want to think about using some of your windfall to give it a welcome boost.

Similarly, it may be worth considering whether you should overpay your mortgage if your lender allows it. This way, you may be able to pay it off sooner and reduce the amount of interest you’ll pay overall.

If you’re a UK resident, it’s also important to note how your windfall could affect your Inheritance Tax (IHT) liability. If it pushes you over the £325,000 tax-free threshold (as of 2023/24), your family may incur a significant IHT bill if you were to pass away suddenly.

Although this is less of an issue if you’re living in Australia, you may still need to assess the impact a large sum could have on your succession planning.

You may need to adjust your investment strategy too. This is because receiving this money may have changed your investing goals and overall appetite for risk, and so you might need to ensure that your current investments are still appropriate for you.

As such, it may be prudent to review your medium- and long-term goals, such as buying a home or saving for retirement. By investing more of your windfall, your money may have more opportunity to grow, and you could meet these milestones sooner.

Just remember that investing always carries an element of risk, and the value of your investments could fall in the event of a market downturn.

3. Clear any debts

A helpful way to achieve financial stability often involves paying off any debts you may have. So, it may be worth viewing your windfall as a financial lifeline and using it to reduce, or even completely eliminate, your debt.

You may want to prioritise your high-interest debts first, such as any credit card bills, as compounding interest can often mean these types of debt can spiral out of control if you don’t deal with them as soon as possible.

Not only could you achieve peace of mind and free yourself from the burden of costly debt, but you may also be able to save money on interest payments in the long run.

4. Consider charitable donations and gifts

If, after receiving your windfall, you wish to financially support your loved ones, you could make gifts to your family. This could also come with the benefit of reducing the overall size of your estate.

Similarly, if you’d rather put your money to beneficial use and give back to society, you could always consider donating some of it to a charity close to your heart.

Not only could this help those in need but, if you’re in the UK, this could also provide tax benefits by reducing your IHT liability, as donations to a charity typically fall outside your estate for IHT purposes.

You can do so by either directly donating to a charity of your choice, or by leaving money to charity in your will when you pass away.

5. Remember to take financial advice

Even though you may not face the same problems as the protagonist in No Country for Old Men, receiving an unexpected windfall certainly comes with both opportunities and challenges for your long-term financial wellbeing.

As such, it’s often helpful to seek financial advice. We can guide you through your options and show you the most effective ways to make use of your windfall to reach your goals. For instance, we could help you:

  • Review your financial plan
  • Assess your investing strategy and ensure your portfolio is adequately diversified
  • Manage any future tax liability.

Ultimately, we can act as a sounding board and assist you when you’re making important decisions, ensuring you’re as confident as possible about managing your windfall.

Get in touch

If you have any questions regarding an unexpected windfall, please get in touch with us.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.