How to make the most of a windfall

The death of a loved one is never easy to manage. Having to make financial decisions about an inheritance at this time is also not ideal.

What should you do with an inheritance? Should you spend it on your mortgage? A car? How about a holiday? Will your inheritance affect your Age Pension? How does Centrelink assess a lump sum?

These are all questions you’ll need to answer at a time when you maybe really don’t want to have to think about it.

So, let’s make it a little easier on you, shall we?

Do you have to advise Centrelink of an inheritance?
Yes, and you’ll have to do it within 14 days of receipt. One-off payments that are unlikely to be repeated, such as an inheritance, are exempt from the income test.

How does Centrelink assess an inheritance?
However, as soon as you put any money into a bank account, superannuation fund or if you were to invest in shares, Centrelink would assess any income derived from it under the income tests, or in the case of superannuation and shares, you will also be assessed under the assets test. Deeming would also apply. The only way you could ‘evade’ assessment is by paying off the mortgage – be it a portion of or in total – on your primary residence, as that is not (currently) assessable.

How soon do I have to make a decision on what to do with my windfall?
Right after someone dies is the worst time to be thinking about money matters. So, even though you may be affected by Centrelink rulings, you’re probably still best to take your time to make a decision. Give yourself a few months, or as long as you need, to cope with the grief and get your head straight.

In the meantime, find a safe place for the money
If you can find a savings account that pays decent interest, or a short-term term deposit, that will mean you’re at least earning some interest on your lump sum while you allow your grief to subside and to reduce the likelihood of emotions ruling your financial decisions. At the time of writing this, neobanks are offering decent interest rates, some as high as 2.25 per cent, which are much higher than banks are currently offering. So, you can enjoy the returns of a term deposit (of yore) and still have unlimited access to your funds. Plus, they’re covered by the Financial Claims Scheme, so amounts of up to $250,000 are protected by the government.

When you’re ready, take stock of your finances
When you feel your grief has subsided enough, review your financial situation and see where you could use the most help. Should you pay off your mortgage? Or do you have credit cards or other debts that could be settled? Maybe you could make your windfall work for you. This is when a trustworthy financial adviser could be your best friend.

The argument for paying down debt
“The simplest answer on what to do with a windfall is to pay off debt. Bringing down your debt will always lower the risk in your financial life and gives you more freedom later,” certified financial planner Wakefield Hare told Money Talks News.

A good place to start is to pay down debt with the highest interest rate or the debt with the smallest balance.

Set up a rainy day fund
You may never have had the luxury of setting money aside for a rainy day or emergency, so take the chance to give yourself some financial security by earmarking some of your inheritance to build such a fund. Set aside enough to cover three to six months of living expenses.

Now you can plan for your financial future
“If you have not done so already, this is a great time to put together a long-term financial plan, review or create an estate plan, and start budgeting,” says financial adviser John Bush.

If you haven’t yet retired, you may wish to consider putting a substantial portion of your inheritance into super. If you are retired and don’t yet own your home, it may be best to pay off that mortgage. Have you planned for aged care expenses? Now may be the perfect time to do it. And if you’re fairly set with your own financial future, you may wish to gift some money to your children.

It’s okay to splurge a bit
A nice way of honouring a loved one who has died is by doing something nice for yourself. So, why not consider splurging on a dream holiday or some other bucket-list experience? An added bonus of this tactic is that, if you do it within 14 days of receiving your lump sum, Centrelink will be less likely bat an eye at your purchase, as it can’t be considered an asset or as you will never have a chance to earn income from it, won’t be considered under the income test.

Just remember that any purchase you make that you can keep will be considered an asset.

Have you recently received an inheritance? How did you manage your money?

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Related articles:
How will an inheritance affect your pension?
Lump sums and the Age Pension
Will an inheritance fund your retirement?

Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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