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How to invest lottery winnings

READING TIME: 7 MINUTES

Coming into a lot of money can sometimes be bittersweet. While on the one hand, the cash can create a new sense of financial freedom and fun, on the other, knowing what to do with the funds can be overwhelming – especially if you start worrying about how to protect your newfound wealth. Fortunately, there are steps that you can take that will ensure your finances are protected. As Lotto x5 gives you more chances to become a millionaire, we asked Kara Gammell, a financial journalist, on ways you can invest your money wisely.

Table of contents:

Here are seven ways to responsibly deal with an unexpected windfall.

1. Mum’s the word

The first thing you need to do is decide whether you want to make your good fortune public knowledge.

If friends and family catch wind of your newfound wealth, you may find people suddenly coming out of the woodwork – and they all will have their hand out.

But being over generous or too charitable can be one of the quickest ways to lose your newfound wealth.

While it might be difficult to hide your new lifestyle from those you know, it may be worth creating a ‘cover story’ if necessary and never share precise details of the amounts of money involved.

2. Take some time to think

The old proverb, ‘The art is not in making money, but in keeping it,’ seems to ring true for many people who receive a huge windfall.

But because of the unexpected way that you came into the cash, whether a lottery win, a bonus or an inheritance, it is easy to think differently about the lump sum compared to how you view the money you have worked hard to earn.

So, it is crucial that you do not get carried away with the luxury lifestyle your new wealth affords, but to take stock and plan.

Here it might be a good idea to stash your money away into an easy access savings account for six months or so.

The interest available won’t be the highest available, but it will give you time before you are in the frame of mind to make a sensible financial plan.

Find a savings account for your needs at SavingsChampion.co.uk.

Bear in mind that the current Financial Services Compensation Scheme (FSCS) protection limit is currently £85,000 per individual per banking institution or £170,000 per joint account, so you may need to consider more than one institution to maximise this protection.

However, the FSCS protects temporary high balances in your bank account of up to £1million for up to twelve months due to certain life events such as an inheritance.

The protection begins from the date the temporary high balance is credited to your account. You don’t need to tell us if you have a balance higher than £85,000.

3. Fail to plan and plan to fail

Rather than making a ‘shopping list’ of what you’d like to do with your newfound wealth, you need to work out your ultimate financial end goal and consider the trade-offs this might entail.

You might want to buy a house straight away, but also pay for private education for your children in the future, for instance – and, depending on the size of the windfall, you may need a detailed plan to do both.

Always keep in mind the true cost of a potential purchase before you splash out.

You know that country pile that you have always dreamt about and now you can actually afford? A sizable property will require costly upkeep which could have a massive impact of that on your cashflow – so do the sums in advance.

Plenty of asset-rich people have been caught out by this and end up having to sell up to avoid going under.

4. Look to the experts

You seldom hear a rich person talk about their spending, more often it is their investments that they focus on.

With this extra money at fingertips, if you play your cards right, you could generate even more by investing your cash.

But, for many inexperienced investors, the thought of playing the stock market or drawing up a financial plan makes them nervous, so, it’s best to seek professional help.

“To successfully grow such a sum of money takes a diverse skillset, not to mention knowledge of tax matters, property laws and an understanding of economics,” says Qiaojia Li, chief executive of Rosecut, the wealth managers.

For instance, you might be surprised to learn some experts say that paying off your mortgage in one go is not always the best idea in terms of growing your finances.

“You need to decide based on your current rate of interest,” explains Li.

“If you are on a fixed interest rate below 2%, the current UK inflation target, you might be better off investing your windfall and using the year-on-year return (which is 7% long term average invested in the financial markets) to gradually pay off your mortgage,” she says.

To get the advice you need, Unbiased.co.uk to find an independent financial adviser.

5. Sort out your estate plan

Coming into a large lump sum should certainly give you a nudge to consider your current estate plan or, if you do not already have one, to put one in place.

It may be a chore that you would prefer to put off, especially when you are still celebrating your new financial security, but the sooner it’s done the better.

While you may have been happy for your children to inherit a few thousand pounds, for instance, when they reached 18, you may feel very differently about them inheriting a lot more.

One option is to stagger payments, perhaps up to the age of 25 or even 30 and to placing assets into one or more trusts.

If you need to find a lawyer to complete your will, Find A Solicitor is a free service from The Law Society for anyone looking for legal services in England and Wales that are regulated by the SRA.

6. Don’t forget the taxman

Tax implications vary depending on the type of windfall you’ve received.

When it comes to an inheritance, for instance, tax is currently levied at a rate of 40pc on the value of an estate above the tax-free threshold, which is £325,000 per person.

Married couples and civil partners are exempt from inheritance tax.

On top of this, your partner’s inheritance tax allowance rises by the proportion of your allowance that you didn’t use, meaning together a couple can currently leave £1 million tax-free.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000.

When it comes to the lottery, this money is treated like gambling wins and as such payments are tax-free.

However, once the payment has been made any interest or income generated from the capital, this will be subject to income tax at your highest marginal rate.

What’s more, if you give away some of your winnings and die within seven years, the lucky beneficiaries might be subject to inheritance tax and face a hefty, unexpected bill.

If you’ve come into your money by selling an asset that has increased in value – shares, for example – you may have to pay capital gains tax (CGT).

7. Consider the long game

It can be tempting to spend an unexpected windfall on something short-term, a sportscar or a luxury holiday, for instance, but if you don’t have much in the way of savings for your retirement, you should consider ploughing some of that money into your pension pot.

Find out how much you can squirrel away for retirement with The Pensions Advisory Service.

All in all, think before spending! As exciting as the surprise can be, it is worth to think smart, take control of the money and make a great plan to spend or invest your lottery winnings.

Do you dream about how to invest lottery winnings? Kara Gammell, a financial expert is here to advise you on how to invest and spend that money wisely.

Why millionaires need a plan

By Stuart Ritchie – August 25, 2020

The first time we helped lottery winners was back in 2014.

They’d originally won £13 million.

They felt like they could do pretty much anything.

No worries for the rest of their days.

But like many of the senior professionals we help all over the world.

They were lacking one important thing.

Before I helped these clients, I remember reading about Colin and Chris Weir from Scotland.

They were Europe’s biggest lottery winners in July 2011.

The husband and wife were catapulted into the Sunday Times Rich List above Beatle Ringo Starr and Sir Tom Jones with their £161 million win.

Their dreams had come true.

I also read however, that for lottery winners, statistics show 70% end up broke.

A third go on to declare bankruptcy.

And for many, money doesn’t always equal a care-free life.

(Many famous faces have also taught us this).

Our lottery winners were aged 52 and 57 at the time of their win.

A labourer and bank cashier, living in a modest three-bedroom terraced house.

Their joint income was £45,000.

Having cashed in their ticket.

Their net-worth now resembled many of the successful international professionals we help every day.

But by the time they sought financial advice, they had £8 million left.

£5 million spent.

On a dream home abroad, two new top of the range BMW’s.

Plus six more properties for family and friends.

Even though they were living their dream life overseas.

They were becoming worried, frustrated and anxious.

Like so many who feel uncertain about achieving their ideal future.

They didn’t have a plan.

And without a plan, millions can become thousands in no time.

Nothing lasts forever

Since The National Lottery started in 1994, over 5,000 millionaires have been created in the UK.

But how long do they remain so?

Several winners who have scooped millions of pounds have ended up spending it all with little or nothing to show for it.

When Pete Kyle won a £5.1 million jackpot in 2005, he said it was “like a dream”.

Stunned, the retired Royal Artillery gunner vowed the money was “going to change” his family’s life.

And for a while, it did.

He took his relatives on lavish holidays, bought cars and boats and swapped his home for a luxury five-bedroom mansion boasting a steam room, bar and pool.

But just three years later, Pete was reportedly broke and on benefits.

He had squandered an eye-watering £4,600 a day.

And was now in his retirement years.

While Pete was spending, the costs of goods and services was rising.

He didn’t have a plan to last his lifetime.

No savings or investments.

What if I told you, that for people with 40 years until retirement, £10 million is the amount they should be aiming to save?

That’s a lot of money, by anyone’s standards.

But inflation means £10 million may just about cover a comfortable retirement.

£1 million will have the same spending power as £306,000 today.

£10 million will equal £3,060,000.

Our lottery winners now had £8 million left.

They were heading for financial disaster in their early 70s because they had started to spend their winnings at an unsustainable rate.

Their general spending had spiralled out of control at £280,000 (after tax) per year, as well as one off expensive gifts.

The result if they carried on like this?

They would have to start selling the houses they had bought for family and friends.

And if they kept up their spending and tried to match inflation for 30 years, then their main home would need to be sold too.

Even lottery winners need a financial plan

By carrying out lifetime cash flow modelling , we were able to illustrate the point at which they would actually run out of money .

A example cash flow plan looks like this:

This sobering realisation led to them to follow this three-point plan:

1. Get professional advice

Our clients’ lives had changed forever.

The drudgery of things like bank accounts and wills needed to be sorted.

Not to mention estate planning and tax planning.

It was time to do the maths.

Put their life into numbers.

To partner with a fiduciary who was ethically bound to have their best interests at heart.

Not sell them products they didn’t need or understand.

One who would take the strain and leave them with a feeling of clarity, confidence and control over their ideal future.

2. Plan now, spend later

Most wealthy people talk about their investments, not their spending.

Our lottery winners agreed to stop spending large lump sums and focus on the long term.

It was time to start thinking about the future.

(Theirs and their loved ones, who they wanted to continue helping).

To get back control.

They needed to put their retirement plans into action, while there was still time.

3. Invest systematically

The couple needed a globally diversified portfolio of low-cost investments, within their low risk tolerance.

A clear and simple way to preserve and grow their wealth over the years to come.

Choosing a globally diversified portfolio meant they would benefit from the growth of the entire market.

Avoiding trades that attempted to predict what’s ‘hot’.

(Needles in haystacks).

Once set up, it would be left alone.

Letting the markets work for them.

A lesson you can take from this case study

Investing for the future always makes more sense than spending in the now.

Build your wealth so you can get and keep the life you want.

Spend less than you earn and invest wisely.

Take financial advice while you’re in the strongest position to do so.

Don’t put it off and risk frittering away your opportunity.

If you feeling in any way confused, frustrated, annoyed or lacking a plan, it’s time you got a second opinion.

Because there’s never a better time to sort your financial position out than right now.

This is the true story of one lottery-winning couple who were losing sight of their ideal future, because they were lacking one thing… ]]>