Come into cash? Four things to consider

Coming into cash sounds like a nice problem to have, but it's often not so simple.

For some people, it may happen because of the loss of a family member or a change in living situation, like divorce, that means you’re juggling a change in finances and personal life simultaneously. While some people might already have an established system for their money, for many, it could be the first time, or first time in a long time, that you’re managing a large sum of money yourself.

This can feel paralysing, and you may be tempted to do nothing rather than risk a move that could put your cash in jeopardy. But thankfully, it’s a path that many people have navigated before, and by taking the right steps, it can leave you in a position of control instead of avoidance.

1. Ensure inheritance tax is settled

This won’t apply to all windfall payments, but if you received a lump sum of money due to a relative passing away, who was not your spouse or civil partner, you may need to pay inheritance tax. In most cases, this is settled by the executor of the estate before you have access to the money, but it’s worth checking to ensure the amount of money you have is really yours to use and not owed in tax.

This can also be the case for gifts, as if the person who gave you the gift does not live for seven years beyond the date it was given, you could owe tax in the future. If you are worried this is a possibility, it’s best to check with the estate’s executor.

2. Check in on your debts

You don’t need to be completely debt-free to start making other moves with your cash, but if not managed properly, it can be an area that weighs heavily on your finances. Loans that are high interest, like credit card debt, can quickly eat into your finances and become a stressor. It’s usually best to pay these off immediately if you have the ability, and a windfall payment is a great opportunity.

Other debt, like mortgages or student loans, are usually at a lower rate that means they are more manageable and might not need to be paid off right away. You could still consider it if the mental load of having that debt is weighing on you, but because these debts often have low interest rates, you could be better off in the long term paying the debt off over time and investing the lump sum of cash now. It’s worth running the numbers to figure out what the right move is for you.

3. Use tax-free allowances

Using your ISA allowances is one of the easiest ways to save yourself stress and be an efficient investor. ISAs allow you to put £20,000 into savings or investment accounts each year with protection from tax. This means that any interest you earn on savings, capital gains from investments, or dividends will be tax free if they are held in an ISA account.

If your windfall payment is coming from a spouse or civil partner that has passed away, your £20,000 annual ISA allowance will expand to allow the amount they held in an ISA to be transferred to yours too.

You could also use a windfall from any source to increase contributions to your pension. Investments in pensions are protected from dividend, capital gains, and tax on interest as well. Typically, you can contribute the lower of 100% of your earnings or £60,000 to your pension each year and receive income tax relief, meaning you wouldn’t have to pay income tax on whatever amount you were putting into your pension. So, if you earned £55,000 a year, and received a windfall payment of £300,000, you could decide to just contribute your salary fully to your pension that year and live off a portion of the windfall payment instead. Once your income  exceeds £260,000, your total pension annual contribution allowance starts to taper down.

4. Don’t be afraid of investing

Putting money in the markets for the first time can feel like a big gamble. But it’s an important part of allowing your wealth to grow, and there’s lots of safety nets you can put in place to help protect your money. You can follow this guide to get going on your investing journey but remember you don’t need to do it all alone. There’s lots of fund options that take care of investing for you, like all-in-one funds, where the only decision you need to make is how adventurous you’d like to be with your investment choices. While the options can be overwhelming, once you get going, you’ll learn that you don’t need to know it all to be successful.