How to handle a windfall: what to do with a lump sum of £10,000

Despite warnings from the FCA that wealthy savers have too much money, windfall recipients continue to seek refuge in safe havens and lose out

A financial windfall, whether anticipated or unexpected, presents a decision: should you invest, spend, or save it? Your decision could mean the difference between losing out on thousands of pounds or doubling your money.

An estimated 5 trillion pounds' worth of UK assets are expected to be passed down between 2022 and 2050 in what is known as the Great Wealth Transfer, the largest generational capital flow in history.

Decisions must be made regarding what remains after inheritance tax has consumed a portion of this. For instance, beneficiaries might think about storing it in an ISA or savings account.

We examine how to decide between a cash ISA and a stocks and shares ISA in a different post.

To find out what people typically do with a windfall, fund manager Fidelity International analyzed a survey of 1,000 investors and asked them what they would do.

According to the study, when people have a smaller sum of £5,000, they usually devote the largest portion to cash savings, which are then followed by investments.

Of this total, individuals would typically invest 1,550 (31 percent) and save 1,900 (38 percent). They would pay off any debts with 400 (8 percent) and spend 850 (17 percent).

It's interesting to note that if they received a bigger amount, their behavior would probably not change.

Those who receive a windfall ten times the amount of £50,000 on average would save thirty-five percent, invest thirty-four percent, spend fifteen percent, and contribute seven percent to debt repayment.

"It's crucial to have a plan in place for how you would use the money, regardless of the size of the windfall," stated Ed Monk, associate director at Fidelity International.

It goes without saying that many of us may spend a small portion of this to indulge or settle debts, but after that, the question of whether saving or investing is preferable arises.

Source: Calculations assuming a 10,000 one-time investment and calculating returns as of April 30, 25. calculated returns over periods of 5, 10, and 20 years. Based on an annual management charge of 0.75% and a platform fee of 0.35%, the calculations include fees of 1.1 percent.

Monk stated: "The numbers do help to paint a picture of the long-term growth opportunities created by investing, even though there is no guarantee and recent volatility serves as a reminder that markets can rise and fall.

You are under no obligation to decide immediately, so take your time determining the best course of action to reach your objectives. If you require additional assistance, consult a financial advisor.

You can still make regular contributions instead of investing the entire amount at once, even though a windfall is a lump sum.

There are five ways to handle a windfall.

Arrange your finances, use some funds to settle debt, and, if you don't already have one, establish an emergency fund. Establish a stocks and shares ISA. After you've done so, you may want to plan on making regular contributions so that you can stagger your contributions. Give your windfall to those who will eventually leave their windfall and larger estate to their loved ones. It's a good idea to give this in advance because the beneficiaries won't be required to pay inheritance tax on it if you live for seven years after making the gift. Take into consideration adding more to your pension. Even a one-time lump sum contribution will grow over time and can add significantly to your pension pot. When you seek financial advice, a financial advisor will listen to your needs and goals before making a recommendation based on your timeline, goals, and particular circumstances.