How to make the most of an unexpected financial windfall

UK National Lottery winner, Michael Carroll scooped a £9.7 million jackpot in 2002. And yet, by 2010, he had squandered the lot and was forced to return to his previous job as a refuse collector.

While a lottery win may seem unlikely, there are many reasons why you might receive a financial windfall at some point in your life. You could inherit money or earn a generous bonus at work, for example.

Wherever your newfound wealth comes from, it could allow you to consider a host of new opportunities.

However, it’s crucial to manage your money with care, especially if your windfall is tied up with an emotional event, such as a bereavement. Otherwise, you might be tempted to overspend – as Michael Carroll did – rather than using  your windfall to work towards your long-term goals.

So, if you’re eager to avoid making similar mistakes, read on to discover five sensible ways to make the most of your financial windfall.

1. Take a beat and avoid emotion-based decisions

Receiving a generous sum of money out of the blue is likely to be an emotional experience.

Seeing your Premium Bond numbers come up or receiving a generous work bonus might leave you feeling excited. However, it’s worth remembering that financial windfalls can also come out of challenging times, such as receiving an inheritance when a loved one passes away.

Wherever your windfall came from, making rushed, emotion-based decisions could result in overspending and regrets.

So, it’s important to take a beat and avoid rushing to spend your money.

Indeed, taking a moment to consider all your options and your long-term goals could help you make decisions based on logic rather than emotions.

Of course, that’s not to say you can’t enjoy some of your newfound wealth when you receive it. Even if the circumstances surrounding your windfall are difficult, you might want to use some of your money to treat your family to a holiday or take some time away from work.

It might be helpful to allocate a small percentage of your windfall for such expenses and initiate a “spending freeze” on the rest while you consider how best to use it.

2. Consider clearing some of your debt

If the monthly interest you pay on your debts exceeds the returns you’d make from putting your new windfall in a savings account, it may be worth clearing some of your debt.

Unfortunately, the interest on your debts will usually accumulate on both the principal amount you borrowed and the previous interest charges. This is called “compounding” and over time, it could mean that you owe a lot more than you originally borrowed.

So, while paying off debt may not seem like the most exciting way to spend a windfall, it might help you achieve greater financial security in the long run.

If your windfall isn’t enough to clear everything you owe, you might want to prioritise paying off your most expensive debts, such as high-interest credit card debt.

It’s also important to keep some savings – using all the money you have to clear your debts could lead to future borrowing and debt.

3. Pass on some of your money to your children and grandchildren

You might want to use some of your windfall to support your children and grandchildren financially. Or to enjoy precious time with them.

Perhaps you’d like to help your child buy their first home, or maybe you’d love to take the whole family on a dream holiday.

In addition to the joy that passing on some of your wealth could bring, gifting money to the next generations during your lifetime could help to reduce a potential Inheritance Tax (IHT) bill when you die.

Thresholds for how much of your wealth can be passed on without an IHT charge have been frozen at their current levels until 2028 and as a result, more people are facing an IHT bill when their loved ones pass away. According to IFA Magazine, IHT receipts rose 16.6% between April and May 2024, which is £0.2 billion higher than the same period last year.

By using your annual gifting allowances and exemptions to give some or all of your windfall to your family, you could reduce the value of your estate for IHT purposes.

4. Bolster your retirement savings

It’s easy to get excited about the short-term goals you could achieve with a sudden influx of cash, such as buying a new car or a second home.

However, it’s important to invest in your future too.

According to FTAdviser, more than half of adults over the age of 40 are anxious about the cost of retiring.

Although the rate of inflation hit the government’s target of 2% in May, the cost of living remains high. What’s more, with higher average life expectancies than previous generations, your retirement could last 30 years or more.

So, your windfall could be a great opportunity to bolster your retirement savings, such as by increasing contributions to your pensions or that of your partner.

You might benefit from speaking to a financial planner who can help you adjust your retirement plans in line with your new financial situation.

5. Seek professional financial advice

No matter how or why you receive an unexpected influx of wealth, it can be an overwhelming experience.

As shown above, there are many options to consider – and pitfalls to avoid.

A financial planner can help you get the most out of your financial windfall by encouraging you to make logical decisions that will further your progress towards your goals.

Get in touch

If you’ve received an unexpected windfall and you’re keen to make the most of it, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.