How to Wisely Invest £1million if You Win the Lottery!
We’ve all dreamed about winning the lottery… but what would you do if you actually won the jackpot? Aside from buying property, helping out friends and family, and maybe taking a fun trip abroad – how would you invest £1million for a steady financial future?
It’d be incredibly tempting to spend every penny on luxury and fine things – but a £1million windfall could give you financial security for life. It’s all about knowing how and where to invest your capital. Try these ideas on for size!
- Winning £1million Means No Taxes
- Invest in Property
- Consider Stocks and Shares
- Pay Into Your Pension
- Think About Inheritance Implications
- Invest in Physical Assets
- More Investing Tips
Winning £1million Means No Taxes
Bit of an attention-grabbing headline that, but it’s true! Unlike money you earn from your job, or profits from things like selling property, there’s no tax paid on winnings in the UK. That means you get the full million pounds into your bank account!
There are a few caveats here, though:
- You may pay tax on your interest payments if you earn over £1,000 a year from interest
- You could be taxed on profits of some things you buy then sell (such as Capital Gains Tax on properties)
- Giving your friends or family money means they could face Inheritance Tax bills if you die within 7 years of the gift
If you’ve suddenly come into a lot of money – whether that’s £100,000 or £1million or even more – always seek professional, independent financial advice before you do ANYTHING. Your adviser will help you make the most of your winnings without getting caught in accidental tax traps. Find a trusted independent financial advisor using VouchedFor.
But, what sort of things would an advisor talk to you about? Here’s how a financial planner might suggest you invest £1million.
Invest in Property
The first thing most people do when they receive a bunch of cash is to look at their housing situation. It’s a good opportunity to secure a roof over your head without needing to faff around with mortgages!
You might want to invest £1million, but try not to spend ALL of it on a house! Look at your current lifestyle, the type of lifestyle you want in the future, and whether you’re likely to move again or need to find your ‘forever home’ that’ll last you well into your older years. Think, too, about the location – buying a remote mansion sounds great on paper, but in reality it comes with much higher living costs as you’ll need to jump in the car every time you want some milk – and things like that quickly adds up!
The running costs of a property are important to consider, too. A large house comes with much higher bills – so you need to factor that in when you’re spending your winnings. Sure, you could get a big house and sell it when the money’s run out – but there’s no guarantee you’ll get the same price for it if you need to sell up fast in the future.
Investing in property is, however, a wise move. It secures your future and ensures you have a capital asset to leave your loved ones if you’re worried about making sure they receive an inheritance. Look at the area you’re buying in, too – you could snap up a property bargain in an up-and-coming area and sell it for greater profit later on.
In fact, you might want to split your winnings across different property investments. Many with such a windfall choose to purchase a modest family home to live in, and then secure an income from buy-to-let properties. A rental income from one, two, or several properties is a great way to make your winnings work even harder for you. You’ll have the capital asset of the property as well as an ongoing income – often with much better returns than savings accounts!
Consider Stocks and Shares
This is, of course, a riskier thing to take on than just keeping hold of your winnings as cash. However, with interest rates so low right now – and the threat of high-balance holders paying banks to save their money should negative rates hit – you’re better off investing some.
Make the most of stocks and shares ISAs first of all. You have an annual allowance each year (currently £20,000) that you can put into your ISAs – and the returns you gain on anything in that tax wrapper are tax-free. It makes putting your money into equities investments worthwhile, and if you pay in your allotted £20,000 at the start of each financial year, your money will have plenty of time to make the most of compound interest to grow and grow!
Of course, if you’re wanting to invest £1million (or a share of it), a £20,000 limit won’t get you very far. You can use other investing platforms to make your own stocks and shares trades – or, you can hire a broker to do it for you. However, brokers skim a fee and aren’t always any better than investing it yourself. That’s especially true when you consider robo-advisors and robo-investors that track the FTSE and international stock markets in the same kind of way – but with much lower platform fees.
Read up about investing in stocks and shares before you take the plunge. You could accidentally lock up your investments if, for example, you buy shares privately in a company that’s not listed on the stock market yet.
Pay Into Your Pension
Yes, yes, we know: pensions are boring. However, you can pay in up to £40,000 a year before losing any tax relief. That means you can claim extra money on £40,000 a year, for free, just by putting it into your pension.
Lots of people who receive a windfall choose to stop working. This means your employer won’t be paying into your pension anymore – and nor will you. Invest as much as you can into your pension, as soon as you can. The longer you can leave these tax-efficient retirement pots with a bunch of cash in them, the more time you have to generate tasty returns. That, in turn, means a much more comfortable retirement!
It’s a good time to look at your current pension providers, too. Do an audit of your current workplace pension, old work pensions, and any private pension providers you’ve got. It could be a suitable time to consolidate your pensions to save on management and investment fees – which eat into your retirement pot every year!
Think About Inheritance Implications
Many of us think about helping out family and friends if we were to win a large sum of money. That’s a very noble plan – just make sure you avoid any hidden tax traps for you OR your loved ones.
Inheritance tax rules means that, if you gift over a certain amount of money, your loved one could end up paying up to 40% of it back to the Government if you die within 7 years of the gift. There are, however, ways to manage this.
First, get your head around inheritance tax rules. You can give certain family members a tax-free amount each year (how much depends on their relation to you). You can also gift close family members up to £5,000 for major life events, such as getting married, without incurring potential inheritance rules.
Other ways to share your new wealth
If you want to help out more, such as helping children with a deposit for their first home, there are some options. For example, you can arrange an interest-free loan between you. Should you pass away within seven years, this loan is taken into account on the estate – so your child receives their portion of your estate minus the loan amount. You could also consider putting your child on the deeds of a property – but there are other tax implications here. There are also benefits if a certain amount of your estate is left to charitable causes. Always speak to an independent advisor before acting!
For some things, you could help your loved ones by paying directly. For example, if you want to fund your children or grandchildren’s university costs, paying their accommodation and tuition fees direct is another way to help.
You can also change who benefits from your will – and how – with things like discretionary trusts or education trusts. You can also benefit your children by paying into a pension for them each year – you can set up pensions for babies as soon as they’re born, and it’s a great way to leave a long-term legacy for them.
With so much money now in your hands, always speak to an estate planner before you do anything. And make sure you have a will written, too!
Invest in Physical Assets
Consider investing in physical things as well as property and stocks. This is because it’s important to diversify your portfolio. Savvy investing, such as timely purchasing of gold coins or bullion, can net you great returns.
More than that, physical assets like antiques, art, designer fashion, vintage toys, and even whiskey and wine, hold an intrinsic value. That means they will always be worth something – unlike stocks and shares, which can entirely crash and lose you every penny you’ve invested!
Investing in physical assets not only diversifies your portfolio, either. It brings you joy! If you collect something that’s special to you, whether that’s pristine vintage vinyl records or old Polly Pockets, it’s an enjoyable way to invest your cash.
More Investing Tips
Whether you invest £1million, £100,000 – or even £100, there are lots of different ways to do it. Make sure you’re fully up-to-speed on ways to invest and make your money work hard for you by reading these articles next!How would you invest £1million if you won the lottery? There's a surprising amount of stuff to consider first – here's what to know!
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. ]]>