Received a windfall payment? Here’s how financial planning can help

One man handing another an envelope

Throughout most of your life, you’ll likely have an idea of your expected income for the months ahead.

However, all that can change if you receive a windfall payment. Depending on your circumstances and the size of the windfall, some of your long-term, distant goals may be immediately more achievable.

A windfall payment could come from several sources, including:

  • An inheritance
  • An equity payout
  • A redundancy package
  • A company bonus
  • A lottery win or prize fund.

In every instance, it’s important to plan carefully to ensure your wealth grows, is used wisely, and doesn’t lose its value over time.

While you may want to treat yourself to some small immediate purchases, it’s a good idea not to make rash decisions about how to use the bulk of it.

Read on to find out how financial planning can help if you receive a windfall.

You may need to revisit your long-term goals

Receiving a windfall could mean you’re able to achieve your previous long-term goals, and you may want to create new ones.

Before revisiting your goals, it’s a good idea to tick off any essentials, such as building your emergency fund and clearing outstanding debts.

You could even explore paying off your mortgage. This can be particularly beneficial if you’re nearing retirement and are worried about continuing to pay once you’ve finished work. However, depending on how much you have left to pay, you may incur an early repayment charge, so you should speak to a financial planner beforehand.

Once you’ve taken care of the essentials, you can review your financial standing and develop new goals based on what you have left. These could include retiring earlier than you’d planned, starting your dream business, helping your children buy their first home, travelling, buying a new property, or anything else you’ve always dreamed of doing.

After you’ve clarified your new goals, a financial planner can help you create a plan that enables you to move towards them efficiently and with confidence.

Giving gifts or donating a portion of your windfall could also improve its efficiency

You may also want to give some of your windfall away, either to support causes close to your heart or to help your loved ones. While you likely want to do this out of generosity, giving gifts or donations can also come with some additional financial benefits.

For instance, keeping hold of your windfall, or the assets you decide to buy with it, could considerably increase the size of your estate. This could mean your beneficiaries face a higher Inheritance Tax (IHT) bill when you die. However, if you gifted them a portion while you were living, you would reduce the size of your estate and potentially lower their future IHT liability.

If you don’t want to gift large sums outright, you could also set up a trust and put the money or other assets in there, so you can be sure how the contents will be used or accessed.

Moreover, if you want to donate any of your windfall to charity, giving through Gift Aid can boost your donation, and you may even be able to claim some tax relief yourself. And if you leave 10% or more of your net estate to charity in your will, the rate of IHT on the rest of your estate reduces from 40% to 36%.

You can read more about the benefits of giving to charity in our previous article on the topic.

A financial planner can help you incorporate gifting into your plan to ensure the people you love and causes you care about are best supported.

It’s important to help your windfall keep pace with inflation and remain efficient

After you’ve sorted your essential costs, revisited your goals, and possibly given some of your windfall away, it’s important that whatever you have left remains efficient and continues to grow to support your new objectives.

This could mean:

  • Contributing a portion of it to your pension
  • Maximising your ISA allowances
  • Investing in the market
  • Exploring riskier investment options, such as Venture Capital Trusts (VCTs).

It’s generally a good idea not to keep too much in cash beyond an emergency fund and anything you might need for your short-term goals, as inflation can gradually erode its purchasing power.

You can read more about the risks of holding too much cash in our previous article on the topic.

Get in touch

A financial planner can work with you to create an efficient strategy for your windfall based on your goals, risk tolerance, and time horizon.

To speak to a financial planner, get in touch.

Email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The value of your investments (and any income from them) 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.