Windfall – what to do with it?
A few of you lucky individuals may find yourselves in possession of a windfall at some point in your life.
“Inheritance is the most common windfall, but one can come from many different sources, such as a redundancy or a lump sum from a pension,” says Oonagh Casey Grehan of Fagan & Partners, an adviser in Dublin. “If you have no financial experience, it can be a challenge to know what to do with the money. But you’ll want to use it wisely.”
I can advise what to do if you are lucky enough to come into a large sum of money.
Hit the pause button!
Stay put for the first few months, apart from lodging your windfall in a safe place. “By definition a windfall is unexpected, so there has likely been no time to prepare a plan,” says Marc Westlake of PortfolioMetrix, an adviser in Dublin. “This means that the most important thing to do initially is not to make any big decisions.”
Vincent Digby, of Impartial Financial Advice, says: “Park it somewhere secure for three to six months while you think about what you want to do with it.”
Get advice
Seek an independent fee-based adviser to help you manage the money. “It will be buttons compared with the size of the amounts involved,” says Digby. The Society of Financial Planners maintains a register of fee-based advisers in Ireland. Avoid banks and stockbrokers, who will try to sell you their products. “Don’t go to your bank, which has short-term sales targets for investment products,” says Steven Barrett, of Bluewater Financial Planning in Dublin.
“Managing money and looking after money is a long-term project, and you want to have an adviser who will work with you over the long term.
Enjoy it!
Do not be afraid to enjoy your windfall — within reason. “It’s OK to go on a bit of a splurge. Take an amount you think is reasonable, and go enjoy it,” says Digby. Bob Quinn, of the Money Advisers in Co Kildare, says: “By all means celebrate your good fortune. If that means taking a percentage off your windfall and calling it ‘play dough’, then do that.”
Pay down debts
Pay off expensive debts such as credit cards and overdrafts. When it comes to your mortgage, it can make financial sense to clear a variable mortgage but keep a tracker loan. “If you’re paying 3.5% on a mortgage, clearing it is the equivalent of getting a guaranteed after-tax return of 3.5%,” says Barrett. “You’d need to get almost 7% pre-tax returns on another investment to be able to beat that. If you have a low-interest tracker mortgage, you could probably earn a better return by investing your windfall.”
Help your children
Do not give cash to children unless the money will be used for a specific purpose, such as buying a house or paying for college. “Funding your children’s education, or helping them get on the property ladder, makes sense. Giving them a big dollop of cash is the last thing I would do, because it is likely they will blow it,” says Barrett. Casey Grehan says parents wanting to give cash to children should use the small-gift exemption, which allows you to hand over €3,000 a year tax-free.
“Both parents can use it to give money to a son or daughter, their spouses or grandchildren. It can be a very efficient way to transfer money tax-free,” she says.
Tackle your pension
A windfall gives you the opportunity to increase your pension contributions and take advantage of pension tax relief. The relief on personal contributions is given an individual’s marginal rate of tax, which is 41% for high earners. The amount of income you can claim the relief on increases with age. For example, if you are under 30, you can contribute 15% of your gross pay to your pension and avail of the relief. If over 60, the contribution can be as much as 40% of your gross pay. “If you want to use the windfall for your retirement and you’re in PAYE employment, you plough it into your pension,” says Quinn. “Start by backdating it last year, and then set up regular premiums and maximise your contributions.”
Budget for future costs
It would be wise to keep enough capital to pay for future costs. “Spending your cash when you have absolutely no idea what the future holds, especially in relation to your future healthcare needs, is not wise,” says Quinn. “You might need to pay for nursing home care, or some sort of home-help medical assistance.”
Invest for future growth
Investing in a diversified portfolio can make your money grow. “For a part of the money, it’s a good idea to build an investment portfolio consistent with your objectives,” says Ian Quigley, director of investment strategy at Investec Wealth and Investment Ireland. “Your aim is to invest in a diverse portfolio of high-quality assets that have stood the test of time. Don’t chase the latest fad — and make sure you get full transparency on all fees.” Quinn advises novice investors to stick to safer assets. “Inexperienced investors should go for something with low volatility to introduce them to the world of investing. You don’t want to lose your shirt in the first 12 months or two years,” he says. Unless you need the income, it is a good idea to reinvest investment gains. For example, someone investing €100,000 and taking out the interest as income each year would have their sum grow to €134,391 over 10 years, assuming 3% growth and 3% income. If you reinvested the interest each year, your pot would grow to €179,084 over the same period.
Update your will
Make sure you have a will that’s up to date. If you die without one, your estate will be distributed under the terms of the Succession Act, which gives two-thirds of your estate to your spouse and the remainder divided equally between your children. “When you’re doing your will, consider passing money to your in-laws and your grandchildren to make use of everyone’s tax-free thresholds,” says Casey Grehan. You should also review your life and health insurance, because a change in financial circumstances could mean you have different requirements.
Have you found yourself in this situation? Have you found yourself in possession of a large sum of money and aren’t sure what to do with it? Let me know!
– Bronny
bronwin@askbronny.com
