How to invest lottery winnings

Table of contents:

• 1. MUM'S THE WORD
• 2. TAKE SOME TIME TO THINK
• 3. FAIL TO PLAN AND PLAN TO FAIL
• 4. LOOK TO THE EXPERTS
• 5. SORT OUT YOUR ESTATE PLAN
• 6. DON'T FORGET THE TAXMAN
• 7. CONSIDER THE LONG GAME

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 take stock and plan.

Here, it might be a good idea to stash your money away in an easy-access savings account for six months or so.

The interest available won't be the highest, but it will give you time to get into the frame of mind to make a sensible financial plan. 

Find a savings account!

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 it? A sizable property will require costly upkeep, which could have a massive impact on your cash flow – so do the sums in advance.

Many asset-rich individuals have been caught off guard by this and end up having to sell up to avoid financial difficulties.

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 your 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 UK wealth managers.

For instance, you might be surprised to learn that 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.

Kara Gammell gave Lottoland some advice for the UK: “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, find an independent financial advisor in Ireland.

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 you would prefer to put off, especially while 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 euros, 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 place assets into one or more trusts.

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, the current rate of inheritance tax in Ireland in 2020 is 33%. Married couples and civil partners are exempt from inheritance tax.

When it comes to the lottery, this money is treated like gambling wins and, as such, payments are tax-free. However, if you want to gift some to a family member, they’ll have to pay tax on it.

Although there is no Capital Gains Tax on lottery (or gambling) winnings in Ireland, another tax may be imposed based on the money you deposit. If your money is earning interest, then Income Tax (DIRT) will be imposed on the interest generated. You will also have to pay income tax on any other investment which provides you with an income, unless it's a tax-efficient vehicle like a pension. 

7. Consider the long game

It can be tempting to spend an unexpected windfall on something short-term, a sports car 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.

All in all, think before spending! As exciting as the surprise can be, it is worth thinking smart, taking control of the money and making a great plan to spend or invest your lottery winnings.