A financial windfall can take many shapes: a lottery win, the sale of property and/or assets, a work-related bonus perhaps. However, for many, the word “windfall” typically means an inheritance when someone dies – something you don’t ever wish for, but you more-or-less know will come your way.
Everybody’s idea of a “life-changing sum of money is different, but if you feel your windfall is burning a hole in your pocket and you are unsure how best to use the money, our quick Guide to Expat Windfalls could offer some food for thought.
1. Evaluate your Debts
Rather than simply paying everything off – which can seem like a wonderfully freeing thing to do – you should first look at any hidden charges for early repayments (such as on a mortgage) and the level of interest you are paying on loans and credit agreements. If the interest you are paying on the original loan amount is lower than the interest you could receive through a savings product or fixed-interest investment, then it might be better to hold onto the debt and continue your monthly repayments.
However, you would need to evaluate income tax on investments and how being debt free might affect your credit rating. Some financial advice is almost certainly necessary here.
2. Invest – Expat regular savings
While a windfall might make you think about fast cars and exotic holidays, it can also mean a secure financial future – particularly if your pension pot is a little on the empty side. So why not investigate an expat regular savings plan and make your windfall work for you and hopefully you’ll have some money left when you retire.
3. Think twice before spending
Yes, this is a reiteration of the above point, but we can’t stress it enough. A windfall should work for you now and into the future. And this means – no matter how much you are telling yourself a Rolex watch or diamond earrings are an investment – you should consider a full financial review before you make any significant moves with your money. You will need to know where your financial liabilities are and how you could remedy them before planning to get your windfall working for you, preferably with a regular savings plan or by investing.
4. Get your money working but protect it at the same time
When you first see that windfall bank balance in your current account and more noughts than you ever imagined possible, it’s tempting to just leave it all there and think of it as a big fat cushion. Or you might spread it out over a few different accounts with your bank and leave it to gain some interest. But, this is not a great idea.
Firstly, if your money is in a UK bank or building society account, chances are it will be covered by the Financial Services Compensation Scheme which will refund you if the institution goes bust. Great, you say – but FSCS only protects a certain amount: £85,000 for single account holders (£170,000 for joint accounts) and these figures are across all accounts per institution, so if you have spread your money across a current account, a savings Bond and a cash ISA, all with the same bank, no matter how much you have, you’ll only receive £85,000 through the compensation scheme if anything goes wrong with the bank.
And if you are banking with an overseas bank, you will need to check out the financial protection offered and whether they are covered by a compensation scheme. You might also find that you have deposited your money with two different institutions who are operating under the same licence (they are owned by the same corporation) which again means you could lose some of your money.
An international financial adviser can help expats set up regular savings plans and investment strategies to help them make the most of their money. By correctly identifying your investing goals, you have the opportunity to get your windfall working for you for the long run and while investing is never risk free, it could offer greater potential returns than bank accounts alone.
5. Think about your Will and estate planning considerations
If you’ve never had a Will before, the arrival of a financial windfall should make it an absolute must to get drafting as soon as possible. If you already have a Will, you might want to revisit the document as greater financial assets mean you may wish to change the terms or set up some trusts for dependants, for example.
And, as an expat, you will need to consider how the succession laws of your country of residence and country of domicile treat inheritance. With the right financial advice and guidance on estate planning you can mitigate some aspects of tax and ensure that your estate is distributed exactly as you want and not simply in accordance with the law of the land where you are living when you die.