What to do when you win the Lottery in Australia

Whether it’s a Saturday Lotto win, Powerball jackpot, or an unexpected Oz Lotto windfall, suddenly coming into a large sum of money is life changing, but it can also be overwhelming.

It is estimated that 1 in 3 lottery winners end up running out of money within 3 to 5 years, because they do not have a clear Financial Plan to follow!

A Financial Plan can help prevent:

• Lifestyle Inflation: Big purchases (cars, houses, holidays) which quickly deplete funds.
  

• Pressure from Others: Requests for money from family, friends, or scammers.
  

• Poor Investments: A lack of financial knowledge which can lead to failed investment choices.
  

• Psychological Factors: Guilt, stress, or feeling unworthy of wealth can lead to self-sabotage or avoidance. Studies have shown that lottery winners can develop higher rates of addictive behaviours such as gambling or substance abuse as many begin to have too much free time without the need to work, and the financial means to support these behaviours.

A skilled Financial Planner can help in the following ways:

1. By helping you create a vision of your ideal life based on your core values: It could be tempting to rush out and buy an expensive car, boat or house - however is that truly important for you? A Financial Planner acts as an objective professional to help guide you to spend your money on what is actually important for you!
   

2. By encouraging you to take a breath and not rush any big decisions: You may want to tell all of your friends and family straight away, however, most past lottery winners all say the same thing - don't tell too many people because some will start putting their hands out. Instead, tell only those in your inner circle to begin with whilst you work with a Financial Planner to protecting your wealth and only gift to those who you want and can afford to gift to.
   

3. By Structuring your Financial Position: When you come into a large unexpected lump sum it is important to break the proceeds into different buckets:
   

   • Your discretionary bucket to go out an enjoy your win!

   • A bucket to clear any debts you have.

   • A short term investment bucket.

   • A long term investment bucket.

   • A bucket that can be used to gift money to friends, families and charity if you wish.

   
   

   Importantly, a financial planner can help you work out the amounts that should be in each bucket based on your goals and the amount of proceeds received. For instance, the larger the lottery win, the more that could potentially go into the 'gift' bucket because you have already funded the necessary amounts in the other buckets first.

   
   

   When you receive large sums of money, tax planning becomes more crucial. Whilst the lottery proceeds are not taxable in Australia, the income that these funds generate when invested can be. For this reason, Financial Planners will often use the following tax structures:

   
   

   • Family Trust: Investments can be purchased in the name of a family trust, and therefore, the income they generate can be distributed to beneficiaries of the family trust (including a bucket company) to reduce the overall tax on investments.
     

   • Superannuation (including a Self Managed Super Fund): Superannuation can provide tax benefits both when you make additional contributions, and also, due to the low tax rate of earnings within superannuation (15% before retirement, and 0% afterwards). Therefore, it is crucial to have a strategy of optimising superannuation (without exceeding contribution cap rules).
     

   • Companies / Investment Bonds: Companies and investment bonds are taxed at a flat rate of up to 30% per annum which makes them a useful 'overflow' investment vehicle when your personal marginal tax rates are at a higher tax rate.
     

   • Private ancillary fund (PAF): is a type of charitable trust in Australia that allows individuals, families, or businesses to create their own structured giving vehicle. The donor makes a tax-deductible donation into the fund, which is then invested, and the income generated is distributed annually to eligible Deductible Gift Recipient (DGR) charities.

     
     

4. By providing strategic investment advice: Once we have allocated your lottery proceeds into the buckets, you need help to make the strategic investment decisions. Some considerations may include:

   
   

   • Having different asset allocations for different investment structures. For instance, you may decide to have more income producing assets in superannuation where the earnings tax rate is lower, whilst having more growth investments within your family trust. Across multiple structures you may have the overall correct asset allocation.
     

   • Whether to access investment opportunities that are typically not available to investors with smaller balances such as private equity or real estate developments.
     

   • Whether to invest ethically, index based, via active management or a combination of strategies.
     

5. By surrounding you with a team of professionals: As you have had a significant change of wealth, you will need new structures set up:
   

   • You may need an accountant to help you set up a family trust or Self Managed Super Fund, and to later do your tax returns for these new entities.
     

   • You may need an estate planning lawyer to improve your Will (for instance by adding in testamentary trust provisions).
     

   • You may need a family lawyer (particularly if you are in a new or defacto relationship) to protect yourself with a Binding Financial Agreement.

     
     
     
     

If you have recently won the lottery (congratulations!) and would like a Financial Plan to achieve your goals, whilst protecting you against risks, you can book in an a free call below:

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This is general advice only. To receive personal advice, you can book an appointment above.