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What to do with a windfall or lump sum payment

So you’ve come into some money, now what to do with it? Planning is key.

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 work out the immediate tax implications.

  • Inheritance—Any money you receive as part of an inheritance is tax-free. But if you’re inheriting an asset like a 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 dependant 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 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 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.
    …and then invest

So now you’ve got your money, what to 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 new-found wealth.

  • 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).
  • Invest in a platform—Can give you access to managed funds, direct shares and term deposits.
  • 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 gain you make are taxed. So it’s important to plan properly to avoid any unwelcome surprises down the track.

And 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.

We can help you make tax-effective decisions about how to use the money to your advantage so contact us today if you would like to discuss this further.

 

Produced by AMP Life Limited and published on 13 May 2015. Original article.

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1 Or 30% if you earn more than $300,000 pa.
2 As long as you are aged 64 or younger at the commencement of the financial year.

© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.