Everybody dreams of coming into a life-changing amount of money.
Enough money that you can quit your job, pay off all your debts, treat yourself to something special, take care of your family, and still have plenty left over.
Whether it’s a cool £100m on the National Lottery, a surprise inheritance from a long-lost aunt, or a big win at the bookies – even the most cynical among of us will fantasise about coming into a financial windfall.
But it’s one thing to daydream about luxury cruises and shiny sportscars, and another to actually deal with the reality of getting rich quick.
Read our investment tips for lottery winners (and other financial windfalls), and when your numbers eventually come up, you’ll know exactly what to do…
1. Take the Lump Sum, NOT the Annualised Payments
According to the National Lottery, all of its prizes are offered as a lump sum, although big winners are also offered the option of receiving annualised payments over a 30-year period.
No matter how much you win, you should always, always take the lump sum.
When you choose to receive an annual payment, you are accepting whatever interest rate is being offered by the National Lottery, and ignoring all of the other options.
In fact, there may be a number of other ways for you to invest your money which are better suited to your lifestyle and investment goals.
Speak to a professional advisor, weigh up your options, and invest your money on your own terms.
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2. Know Your Tax Liabilities
According to HMRC, all lottery winnings are completely tax free. If you win £100m, you keep £100m – it’s as simple as that!
However, once you start spending, saving, investing and gifting that money, it’s a different matter.
Once you bank your winnings, they become part of your estate. Under Inheritance Tax laws, this means that anything above the value of £325,000 will be subject to 40 per cent tax after your death.
You can get around these laws by drawing up a will which transfers your wealth to a spouse, a charity or an amateur sports club.
However, if you have given away any money within the seven years prior to your death, the recipients will be liable for inheritance tax.
Another issue for newly-minted millionaires is Capital Gains Tax.
While your winnings are tax-free at the point of collection, any returns above a certain value will be subject to 20 per cent in capital gains tax.
Any money made from the sale of a property will be subject to 28 per cent tax.
Before you invest any of your money, seek professional advice on your tax liabilities so that you – and your loved ones – aren’t caught out with a big tax bill within a couple of years.
3. Change Your Bank
This is not strictly necessary, but once you have a sizeable bank balance, you might find that your High Street bank is not offering you the best value.
If you have more than £500,000 in liquid assets, you are defined as a ‘high net worth individual’, and may be eligible to join a private bank or investment house.
These banks are keen to court high-value clients, and they offer a raft of benefits including favourable savings rates, bespoke portfolio management, and even tax advice.
4. Create a Diversified Investment Portfolio
This is the first rule of investing.
A diversified portfolio simply means that you don’t keep all your money in one place. Not the bank, not in property, not in gold bars, and certainly not in more lottery tickets.
Instead, seek the advice of an expert who can help you to work out where and how to invest your money.
Your ideal investment portfolio will depend on the total value of your investible wealth, your risk awareness, and your target returns.
It may change over time, and you will probably have some good years and some bad years, but if you spread your money across a number of different sectors, you stand a much better chance of growing your wealth over time.
5. Don’t Get Greedy
When your numbers come up, you feel invincible. After all, the chances of winning the lottery are – at best – one in 14 million. There is a huge temptation to ride this wave of good luck and ‘reinvest’ your winnings into a similarly high-stakes bet, or a high-risk investment.
This is not a good idea.
Windfalls and wealth management are two very different things. No one ever built a successful portfolio out of high-risk bets and lottery tickets.
Instead, the smartest investors diversify their wealth across a variety of different sectors, aiming for relatively modest annual returns which will compound over time, allowing the investor to maintain and build on their capital.
As a general rule, no more than five per cent should be invested in extremely high-risk areas, and should be offset by keeping ten per cent in cash holdings.
And no matter how much money you have at your disposal, remember that you should only ever bet what you can afford to lose.
What would you do if you wont the lottery? Let us know in the comments!