Who doesn't dream about receiving a ‘pot of gold’?
The reality of receiving a financial boost can involve lots of decisions and may impact entitlements and tax. Before you splash out on a holiday, new car or luxury item, think about these strategies that can have long-lasting financial benefits.
Paying off non-deductible debt (i.e. debt that you can’t claim a tax deduction for part or all of the interest payments), may be a good idea.
Let’s say you have a home loan and you’re paying interest of 5% p.a. If you use some of your windfall to pay off all or part of that loan, you’ll automatically save on interest—especially when you consider the compounded interest you’d save over time. Paying off a loan can also mean you avoid future loan interest rate increases.
If you have more than one non-tax-deductible debt, it’s generally advantageous to pay off the debt with the highest interest rate first.
Before you pay off any loans, remember to check whether there are any penalties (e.g. early repayment or exit fees) that apply.
Plan for upcoming expenses
Consider keeping some of your money readily available for upcoming expenses (like car registration or home repairs). Or just have some extra available for a rainy day.
Having money readily available can also protect you from sudden market volatility.
ASIC’s MoneySmart site suggests that setting aside enough to cover between one and three months of your regular expenses is a good yardstick for how much to save.
Consider your government entitlements
If you’re receiving the Government Age Pension, your windfall can potentially affect your pension payments. This is because of the way ‘lump sums’ (one-off cash payments) are treated under the income and assets tests Centrelink uses to assess how much pension you’re entitled to.
If you spend the money on an exempt asset such as your principal residence, the amount spent will not be means tested. However, if you buy other assets which are assessable, such as artwork or a holiday home, your purchase will be counted as an asset and might affect how much pension you receive.
Invest the money
Investing your windfall can generally help it last longer. If you choose to invest your money, it’s important to consider your investment portfolio (including your pension) as a whole. This will help ensure you’re not overexposed to any one type of asset.
Let’s say your super is mainly invested in defensive assets (such as Cash and Fixed Interest). If you invest your windfall in Cash and/or Term Deposits outside of super, your overall investment portfolio will be entirely defensive assets—which may not suit your risk profile.
Diversification means investing across a mix of assets, rather than investing all your money in just one type. Because different types of investments tend to perform differently from one another at different times, diversifying your investment portfolio can be a good idea.
Read more about investment choice.
If you’re under 65, or aged 65 to 74 and satisfy the Work test, you may also consider investing the money in an accumulation-style super account. And, if you’ve reached your preservation age, you can then use these funds to purchase a new pension.
Just be aware there are limits—called contribution caps—on the concessional tax treatment of super contributions.
See how UniSuper Advice can help you