What to do with a windfall or lump sum payment

May 18th 2022 | Categories: Investing |

First of all, what’s a windfall? Essentially, it’s a large sum of money that is received unexpectedly, whether it be winning it, acquired or just suddenly due to chance events. For most of us, a financial windfall isn’t something that comes around very often. And while the extra cash is welcome, money matters can be the last thing on your mind if you’re also dealing with the emotions of losing a loved one or being made redundant. But it’s important to be prepared so that if you do come into a large lump sum of money unexpectedly, you know what to do with it.  

Sort out the tax

The first thing to do is to work out the immediate tax implications. Because unfortunately, that is to be considered. Inheritance Any money you receive as part of an inheritance is tax-free. But if you’re inheriting an asset like property things it can get a little more complicated. And you may need to pay tax on any super death benefit you receive unless you’re a spouse, minor child or a tax dependent of the deceased. Redundancy payment It’s never a pleasant experience when your employer decides your role is surplus to requirements. But if you’re fortunate enough to have some advance warning, it can be easier to plan. Redundancy payments from your employer receive concessional tax treatment, depending on your income and other factors. Read up on the ATO’s advice and consult your tax adviser. Work bonus You’ve worked hard all year and here’s your reward. But don’t wait until the last minute. You’ll need to decide in advance whether you want any bonus paid into your bank account and taxed at your usual marginal rate or paid into your super and taxed at the concessional rate of 15%¹. But watch out that you don’t go over your total yearly cap of $30,000 (or $35,000 if you were 49 or older on the 30th of June 2014)—this includes your regular employer payments and any salary sacrifice payments you may be making. Prize or gift If you’re lucky enough to win a lotto or other one-off the prize, you don’t need to declare it. But you may need to declare a gift you receive if it’s related to your job. So if your great aunt Mildred gifts you $20,000, you won’t need to declare it, but Mildred should be aware that any gift over $10,000 could affect her pension entitlements. & if so then we recommend too….invest.  

So now you’ve got your money, what do you do with it?

While it’s tempting to rush down to the travel agents and book that Pacific cruise. You might like to consider other ways of spending your newfound wealth. We have listed some ideas.
Improve the family home
You could use the money for that renovation project you’ve been planning. Any improvement to your family home could add value when you come to sell. AMP’s renovation budget tracker can help you keep track of how far your windfall will go.
Pay off the home loan
If you’re like many Australians, you may have substantial debt in the form of a home loan. So you could use your windfall to pay it off. But in an era of low-interest rates, there could be better ways to invest your money.
Pay off your other debt
If you owe money on your credit card or have other loans with high-interest rates, now could be a good time to pay them off. Check out how to pay off your debt effectively.
Boost your super
You can make up to $180,000 a year (or $540,000 over three years²) in after tax-contributions. These don’t attract the concessional tax rate but once in super, earnings are only taxed at 15% and withdrawals are tax-free once you’ve reached age 60 (and are able to access your super).
Buy an investment property—Enjoy a rental income plus any potential capital gain down the track if the property increases in value—you can be positively or negatively geared, depending on your tax situation.
Save for the kids’ future or help other family members in need—Put your windfall towards your children’s education by investing in a long-term tax-effective saving vehicle like a growth bond.
Donate to a worthy cause—Any money you give to charity is usually tax-deductible.
 
Remember, what you do with your money can affect how any earnings or capital gains you make are taxed. So it’s important to plan properly to avoid any unwelcome surprises down the track. Don’t forget to make sure your will is up to date so that your money goes to the people you want it to if anything happens to you.

Contact us today to find out how we can help you make tax-effective decisions about how to use the money to your advantage

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What you need to knowThis information is provided by Invest Blue Pty Ltd. (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice regarding those matters and seek personal financial, tax and/or legal advice before acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.