Whether it’s an unexpected inheritance, a legal settlement, or a well-earned career bonus, receiving a significant lump sum can feel like winning the lottery. So, what should do if you receive a large sum of money? Whether it’s a cash gift or an inheritance, there are many things to consider, including tax implications and lifestyle changes. We’ve shared a guide answering common questions to help you make the most of your money.

What should I do if I receive a large amount of money?

If you have recently received a large sum of money, then the most important thing to do is to stay calm. Give yourself time to mentally process your situation, so you can make sensible plans. Emotionally driven decisions are unhelpful when you need to make financial choices.

Avoid any major lifestyle changes or big purchases for the first 3 – 6 months. This acts as a “cooling-off” period, which will allow you to think more rationally. During this time, you may need to move the money into a secure, UK-regulated, easy-access savings account. This will keep it safe and allow you to earn some interest while you formulate your financial plan.

Depending on how much you have acquired, it can be beneficial to be selective about who you tell. Newfound wealth can bring difficult conversations, such as unsolicited advice or awkward expectations from friends and family. It’s your money, so you need to protect the funds, your emotional health, and your relationships.

Before you spend or invest your newly acquired money, it’s worth clearing any high-interest debts like credit cards or personal loans. Also, consider putting some money aside for an emergency fund to act as a financial safety net for your peace of mind. Aim for enough money to cover 6 – 12 months of living expenses.

How do I create financial planning goals?

Before looking forward to what you plan to do with your money, take a look at where you are today. Create a clear list of your current assets, debts, and monthly outgoings. By getting a clear picture of your situation, you can define your priorities and set suitable financial goals.

Consider the following:

• Short-term goals: Give yourself financial security and peace of mind for everyday living.
• Medium-term goals: Factor in big spends such as home renovations, a luxury holiday or a new car.
• Long-term goals: Think about what you would like to do when you retire and how you can build a legacy.

How much tax will I pay on a lump sum?

Depending on the type of lump sum you have received, there may be tax implications. Check if the money you have received is subject to income tax. If it’s through an inheritance, the estate should have already handled the inheritance tax. If you have received an insurance claim, many policies are tax-free, but you will need to double-check the policy terms.

If you have been gifted a large sum of money from a family member, then there may be inheritance tax to pay if they die within 7 years. For more information, see our blog The family gifting guide: Passing on wealth while you’re still here.

How can I minimise tax on a lump sum?

In the UK, there are specific “tax wrappers” that can prevent your windfall from being eroded by unnecessary tax. From ISAs to pension contributions, there are many ways for you to preserve and grow your wealth in a tax-efficient way.

Make use of the annual tax-free £20,000 ISA allowance. It may be worth increasing your pension contributions for salary tax relief and a better standard of living in retirement. Check if the lump sum is going to take you over inheritance tax thresholds.

Consider investing some of your money so it has the potential to grow. A recommended approach is to spread your capital across different asset classes, such as equities, bonds, property, cash, etc. However, if an investment sounds too good to be true or “guarantees” high returns, it could be a scam. Unfortunately, newfound wealth often attracts fraudsters.

Before investing, always speak to a qualified financial planner who can guide you through the process. There are responsible investing options that you might want to consider.

Stay calm and act strategically

Money changes your legal standing, so it’s important to make sure paperwork is up to date. You will need to update your will to reflect your new financial circumstances. It’s also worth arranging a Lasting Power of Attorney (LPA) to protect your interests if you ever lose the capacity to manage your finances.

Getting a large windfall isn’t just about money; it’s about designing a life and a future that fits your aims and aspirations. Ask yourself how this money can buy you more time, reduce your stress, or allow you to do more things that you love.

Receiving a lump sum or inheritance advice, Nottingham and Derby

If you have received a large lump sum, then it’s important to build a sensible financial plan. Not only do you want to protect your money, but you may also want to preserve it for future generations. Check how your tax position will be affected and review your strategy annually.

At Balance: Wealth Planning, we can help you build a solid financial plan that enables you to enjoy your cash today and ensure future financial security. Whether you need help managing an inheritance or a big lottery win, our team will also look at ways of reducing your tax bill.

If you’ve recently received a large lump sum, get in touch to speak to our financial planners.

Sources:
https://www.gov.uk/inheritance-tax/gifts

https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/

https://www.moneysavingexpert.com/savings/how-to-manage-very-large-savings/