For most of us, a financial windfall isn’t something that comes around very often. And while the extra cash is welcome, money matters may 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 if there are any tax implications. A financial adviser can help you work through these and make the most of your money.
- Inheritance—You may have to pay tax on your inheritance depending on where the money comes from. For example, you may need to pay tax on any super death benefit you receive, unless you’re a tax dependant of the deceased (eg a spouse, child aged under 18, a financial dependant or someone who the deceased had an interdependency with).
- Redundancy payment—If your role is made redundant, the payments you receive on termination of your employment will generally be taxed concessionally (unless you’re aged over 65). Speak to your employer to confirm how your redundancy will be calculated.
- Work bonus—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 salary sacrificed into your super and taxed at the concessional rate of 15%1. But make sure that you don’t go over your total yearly concessional cap for super of $30,000 (or $35,000 if you're turning 50 or over before 1 July 2017)—this includes your regular employer payments and any salary sacrifice payments you may be making. Also note, this cap will be reduced to $25,000 per year, for everyone, irrespective of age from 1 July 2017. Certain conditions must also be met for you to be eligible to salary sacrifice your bonus – please speak to your financial adviser first.
- Prize or gift—If you’re lucky enough to win lotto or another one-off prize see a financial adviser to discuss the best way to invest it. If you're receiving a social security benefit, these amounts can impact your entitlements.
So now you’ve got your money, what to do with it?
While it’s tempting to rush down to the travel agent and book that Pacific cruise, you might like to consider other ways of spending your new-found wealth.
- Pay off your 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.
- 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—Up until 1 July 2017, if eligible, you can make up to $180,000 a year (or $540,000 over three years if you’re under age 65) in after tax-contributions. From 1 July 2017, this will reduce to $100,000 a year (or $300,000 over three years if you're under age 65). After-tax contributions 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 can access your super). You can also consider pre-tax super contributions.
- Invest in property, managed funds, direct shares or term deposits – but check what’s right for your personal circumstances.
Want to know more?
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 and other estate planning matters are up to date, so that your money goes to the people you want it to if anything happens to you.
Speak to your financial adviser to help you make tax-effective decisions about how to use the money to your advantage. If you don’t have an adviser, call us on 131 267 or use our find an adviser tool.
1 Or 30% if you earn more than $250,000 per annum.
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Our online learning module explains why a will is important and how to go about writing one so your money and assets end up in the right hands.
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