What to do if you receive a sudden windfall of wealth

In some scenarios, you may have expected to receive this money, or it may have come as a surprise. Circumstances in which you might receive a windfall of wealth include:

· Inheritance

· A gift from a living relative

· Selling property or a business

· Shares vesting

· Getting a large bonus at work

· Winning the lottery

When it comes to figuring out what to do with a sizeable windfall of cash it is often a good idea to obtain financial advice or guidance as a starting point. A J.P. Morgan Personal Investing wealth expert can support you in structuring your wealth to help meet your financial goals in a tax-efficient manner. We provide 'restricted advice', meaning we only make investment recommendations on the products and services that we offer.

Come up with a plan

Whether or not you do speak with a wealth expert, it can be helpful to identify a list of priorities when figuring out what to do with a sudden windfall of wealth.

Funding your current lifestyle

Firstly, it’s important to establish how much money you need to support your current lifestyle. You might already be in receipt of income from employment, or other sources, such as from your investments. Consider whether you need this new money to help make ends meet.

Pay down debt

You might have some debt that needs paying down, or insurance that needs paying for. Using your windfall to pay down debt can go a long way to ensuring your financial security, particularly if the debt carries a high rate of interest. Homeowners who want to pay down their mortgage early can incur additional fees, so it’s important to speak to a mortgage expert when considering this option.

Set aside cash for emergencies

Once you’ve established that you have enough money to fund your current lifestyle and have tackled any outstanding debts, or other obligations, you can start to think about setting aside some cash for emergencies. While keeping too much wealth in cash can leave your windfall vulnerable to the effects of inflation – effectively reducing its value – it’s a good idea to have some money that is easily available to meet urgent spending requirements, such as unexpected home repairs.

Buy financial protection

It might also be sensible to use some of the money to secure financial protection, purchasing policies such as life insurance to make sure that your loved ones have financial support in the event of your passing.

Fund your retirement

Using some of the windfall to fund your retirement could be a smart move. The Pensions UK trade body estimates that a one-person household would spend £43,900 a year to enjoy a comfortable retirement of more financial freedom and some luxuries. This rises to £60,600 every year for a two-person household. If you want a comfortable 25-year retirement, you would need a total pension pot of approximately £1.1m, according to our estimates.

Help out loved ones

You could use the windfall to help out dependants with a house deposit, pay for adult care, or private school fees. Bear in mind rules around gifts and tax, however.

Enjoy yourself

Enjoy your money. Not everything you receive needs to be stashed away for a rainy day or invested. Receiving a windfall could be a good moment to take stock and pursue an opportunity – be it travel, education, or a hobby – that may have previously been unaffordable.

Put your windfall to work

If you can, it may be sensible to put some of your windfall to work and invest it in financial markets. Our investment principles will help guide your thinking on how to invest.

Your capacity for investment risk will normally increase after a sudden windfall of wealth, although an imminent financial outlay – say, on a house deposit – might reduce your ability to withstand near-term losses.

You may choose to drip feed your investments and ease into the markets, or alternatively invest one lump sum. This is entirely down to personal preference, and it’s impossible to know which of the two approaches is the ‘correct’ one until time has passed and you can review your investment performance. A J.P. Morgan Personal Investing wealth expert can support you on how to invest.

It's important to think about the potential impact of tax on your windfall. When we talk about investment products, we will often use the phrase ‘tax wrapper’. This simply means your money is in an account that ‘wraps’ around your investments using the tax allowances you are entitled to. Your investment returns can be tax-free as long as the money stays within these wrappers.

J.P. Morgan Personal Investing offers a suite of investment products, some of which are tax wrappers:

Stocks and Shares ISA

You can invest up to £20,000 each tax year without paying tax on any returns in a Stocks and Shares ISA. You can choose from five investment styles that prioritise long-term growth, or invest for income for an option that's designed to pay you sooner.

Lifetime ISA

If you're working towards financial goals like saving for your first home up to a value of £450,000 or looking to retire from the age of 60, a Stocks and Shares Lifetime ISA (LISA) might be right for you. You won't have to pay tax on any returns and you'll get a 25% government bonus on investments of up to £4,000 a year. Contributions to a LISA form part of your £20,000 annual ISA allowance. A LISA can only be opened if you are aged 18 to 39 and you can keep paying in until you turn 50.

Junior ISA

If you're looking to build a foundation for your child's future, a Stocks and Shares Junior ISA (JISA) allows you to invest up to £9,000 every tax year for each child. This is on top of your own ISA allowance and any returns won’t be subject to tax. Our JISA can be set up by a parent or guardian for children under the age of 16, and anyone can contribute, ready for your child to access when they turn 18. A child can have one Stocks and Shares ISA and one Cash ISA. If you have multiple children, you can open a Stocks and Shares ISA and a Cash ISA for each of them. J.P. Morgan Personal Investing does not offer Cash ISAs.

Personal Pension

A Personal Pension is a savings product that is available to customers who want to invest for their retirement, sometimes in addition to a workplace pension. Personal Pension contributions – out of post-tax income – attract basic rate tax relief on contributions up to the lower of your relevant UK earnings or the annual allowance (currently £60,000 for most people). This means if you are able to pay in the full £60,000 you only need to contribute £48,000 as the remaining £12,000 will be added by the pension administrator and collected from HMRC. This £60,000 threshold could be lower if you have earnings above £260,000 or have flexibly accessed your pension. It could be higher if you are able to carry forward any of your unused pensions annual allowance from the last three tax years. You need both sufficient earnings in the current tax year and unused previous annual allowances to use carry forward.

Higher and additional rate tax payers can claim further income tax relief by completing a self-assessment tax return. This is not paid into the pension, but is provided by extending your tax bands and therefore paying lower rates of tax on income.

General Investment Account

If you've used your full ISA allowance, a General Investment Account (GIA) allows you to keep investing without limits, but you may pay tax on any returns.

There are three key types of tax that can impact investors:

Capital Gains Tax (CGT): CGT is the tax you are required to pay when you sell or ‘dispose’ of an asset for a profit, or 'gain'. A capital gain is, broadly speaking, the difference between the price you paid for something and the price you sell it for. The tax you pay is on the gain only – not the total sale price. There is also a tax-free allowance for CGT so you don’t pay CGT on the first £3,000 of gains each tax year.

Income tax: Income tax is levied on most types of income, most commonly on wages and salaries. But you may also need to pay income tax on interest and dividends from investments and savings if you exceed the available annual allowances.

Inheritance Tax (IHT): When a person dies, the assets they leave behind form their 'estate'. IHT is charged on the estate left, but only if it exceeds a certain threshold, and only if it does not pass to a spouse, a civil partner, or a charity or community amateur sports club. Certain assets are also fully or partially exempt.

We have written a guide on tax-efficient investing that explores how to use investment products and manage wealth in a tax-efficient manner in more detail.

Spend your money

Receiving a big windfall can be a seismic event, and it’s important to maintain discipline when thinking about your enlarged wealth.

Once you’ve moved through the list of priorities that we’ve identified, you should look to enjoy your new financial position. Speaking to a J.P. Morgan Personal Investing wealth expert can help you structure and deploy your money so that you can pursue an ambition that might previously have been unaffordable – be it travelling, a new car, education, or even a career change – while ensuring that you have enough in the bank to fulfil your day-to-day financial obligations.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. ISA/JISA/LISA/Pension eligibility rules apply. With LISAs, government withdrawal charges may apply. Tax rules vary by individual status and may change. This is general information, not personalised tax advice.