What you need to do when a sudden and unexpected wealth event happens

What you need to do when a sudden and unexpected wealth event happens

What would you do if you got a windfall of over £1 million?

You may have thought about it a few times whilst daydreaming, of course—but what happens when it becomes a reality?

After all, this really isn’t something you want to get wrong. It’s a rare opportunity to change your life. This blog explains how best to react to a financial windfall like this: what you should do, how to get help, who you should tell, and who it’s better to keep out of it.

“About 70% of people who win a lottery or get a big windfall end up broke in a few years”.

National Endowment for Financial Education

This guide will help you to be among the 3 in 10 who don’t lose it all.

In a situation like this, it’s crucial to understand what perks to look out for and what pitfalls to avoid. Entering ‘How many lottery winners go broke’ into Google yields a dispiriting 2,380,000 results. Reading this guide will help you to use a windfall to transform your life for the better, not for the worse.

John McGuiness won £10 million in 1997. After a splurge on holidays, cars, his ex-wife and a second wedding, plus a stake in a local football club, by 2009 John was a recluse with little money left.

Pete Kyle won £5.1 million in 2005. His splurge involved lavish holidays, gifts, cars, boats and a big new house. By 2008 Pete was reportedly broke and on benefits.

Callie Rogers won her £1.8 million in 2003 and spent it on partying, drugs, boob jobs and clothes. Callie was only 16 when she won.

Source: www.mirror.co.uk

NS&I recently announced the winners of the two £1 million prize draws for August 2019. One lives in Hertfordshire (quite a lucky county with 10 Premium Bond millionaires already). The second winner is from Chester (the eighth Premium Bond millionaire from that area). The June and July 2019 winners live in East Sussex, Durham, Kent and Hertfordshire.

All Premium Bond holders know that the odds of winning are long, but still, every month, two more people get that £1 million payout. If it happened to you, would you be prepared for it?

Whatever direction the windfall blows

There are a lot of ways you might suddenly or unexpectedly find yourself in possession of a life-changing sum of money, including:

  • An inheritance
  • A lottery win
  • A Premium Bond win
  • An insurance policy claim
  • A legal settlement
  • Selling your business
  • A gift
  • Selling your shares in a company being taken over

Whatever direction the money comes in from, it lands at your feet. It’s all yours. Now what?

What’s your plan?

If you’re like most people, you don’t exactly have a detailed plan for this moment lying ready in a desk drawer. But it’s important to make one before you do anything else—resist the temptation to celebrate by splashing out recklessly. Otherwise, you may have a lifetime of regret ahead of you.

The point of this isn’t to rain on anyone’s parade or dampen the natural excitement of the windfall, but just to get you through the initial emotional roller-coaster in one piece. When was the last time you made a fantastic and rational decision during a moment of high stress or excitement?

Step one is to write down everything that you would like to do, buy or gift with the windfall—how much, who to, when and why. Get it all down on paper.

Step two is to put the list in an envelope and back into the drawer. Don’t do anything. Think about it and let it all sink in. Time will change your initial thoughts, and when you go back to the list, chances are you’ll have changes to make.

Who do you tell?

This is tricky. You might want to shout your good fortune story from the rooftops and share the love, or your first instinct might be to try and keep it a secret from all those around you.

Whatever you choose to do, think about it twice. Give yourself some time. Start with the one person closest to you, someone you trust 100%, and share the good news with them in a private space.

Very few people share exactly the same views when it comes to money, debt, spending and savings. Don’t expect them to agree with everything you say. This conversation could be surprisingly tricky, and might lead to conflict or disagreements. That conflict would be the first of many as you open the conversation to more people.

This is why you need to give yourself time. The time to think things over and change your mind. The time to reflect and consider, calmly and away from other people’s noisy opinions and feelings.

As a general rule, don’t tell family and friends straight away or present the news too abruptly. A sudden or public announcement could come back to bite you.

Strategy

Your initial list is written and safely in the drawer. Great! Now it’s time to consider the wider financial issues, like:

  • What taxation issues might arise with the windfall? Is it tax-free or not? If not, how much do you need to pay, who to, and by when? Earmark and set aside any tax liability in a defined account so that it doesn’t get commingled with the other money.
  • Where is the windfall sitting right now? Consider the Financial Services Compensation Scheme (FSCS) ‘temporary high balances’ protection. Cash up to £1m is protected from failure for six months. Protection then reverts to £85,000 per account per person. If your windfall exceeds £1m and you want total cash protection while you make up your mind, you are going to need to open a lot of new accounts.
  • If you have a financial planner, now is a good time to meet them and discuss your good fortune. They should be able to reassure you and offer some alternative and sensible short-term homes for your money that you may not have considered.
    Once the dust has settled, they can also help you with investing, pensions, ISAs, gifts and inheritance tax factors.
  • It is reasonable to allow yourself an initial 10% of the windfall for the here-and-now, to have fun experiences with, to travel, even to buy some ‘stuff’. This is a happy occasion, and it’s okay to give yourself a little celebration fund alongside the boring or difficult stuff. Make yourself smile!
  • Depending on your circumstances, now is also a good time to create your own emergency fund, equal to between 6-12 months of your net living costs. This is there to cover the speed bumps in your life; it’s not for meals out at a Michelin star restaurant.
  • How much debt do you have? Car finance? Credit cards? Mortgage? This could be an ideal opportunity for you to gain financial freedom. The opportunity to become debt-free is one many people never get, so it’s a good idea to take advantage of it. Just make sure you’re aware of any exit penalties for paying off debt early.
  • Is it worth considering a change in home? Be smart about this—think about your needs rather than spending a fortune on a huge, flashy place. You might not need a larger home, but you may want to live somewhere nicer – better schools, transport, parks and amenities. Moving to a new house has a lot of associated costs, so factor all of them in.
  • Top-up your investments for your long-term future. Is your pension pot full, or is there catch-up headroom? Have you done an ISA? Have you got Premium Bonds? Your financial planner can help you establish what’s best to do.
  • Think about gifting and good causes. Are there other family members who need a helping hand, like education costs or a leg-up onto the housing ladder, for example? Do you have a good cause or charity close to your heart? Having a written plan will help you to decide who can get what and by when.
  • Check your legal circumstances. Is your will up to date and relevant? Do you have both forms of Lasting Power of Attorney? Is your business life safe from creditors? Do you have a complex set of relationships, for example with an ex-partner and a new live-in partner, or children to consider? See a good family solicitor if you need help.

Is your windfall as big as your imagination?

When you start adding up all of the things that you would love to do with the money, have you actually got enough?

Start with the ‘must haves’ first. Cement them in. Then move on to the ‘good to have’ list. If there is anything left, you can include the ‘nice to have’ elements. Again, 70% of windfalls are spent unwisely and rashly in the completely wrong order, so don’t fall into that trap.

Controlling your impulses and emotions at a time like this is tricky. That’s why time and external professional guidance are your key resources, to prevent any reckless missteps. When you open your envelope and look at your initial list after several months have elapsed, you may find that you have saved yourself from grief by not acting on it immediately.

If you could benefit from calm counsel and a second opinion, contact one of the specialists at Capital today.

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