If getting an inheritance or sudden windfall of cash, it can be difficult to know where to put it. If a lump sum of money – perhaps £30,000 – landed in your bank account tomorrow, what would you do with it? You might be tempted to splash out, but if you get a sudden windfall from an inheritance or compensation, using it wisely can set you up for the future and boost your savings. We asked the experts, who told The i Paper what they would recommend for someone who has received a lump sum of cash. (Photo: LaylaBird/Getty)

Pay off any debt

What you decide to do with a windfall will depend on your current financial situation. Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “Someone with a number of debts that are attracting heavy interest payments should prioritise paying those off, while perhaps keeping a small sum for any unexpected expenses to prevent them falling even deeper into the red.” This could mean paying off credit-card balances, personal loans or your mortgage – and you should especially prioritise debts with a high interest rate. (Photo: Fizkes/Getty)

Keep a cash buffer

If you don’t already have a stash of emergency funds, you should consider setting some money aside for this. This means you’ll have a buffer if you need to fork out for things like car repairs, home damage or even the loss of your job. Ian Batterbee, financial adviser at Sterling and Law, recommends putting about three to six months’ worth of outgoings into a savings account where they can be accessed quickly. For example, you might look at putting this money into an easy-access savings account, a Cash ISA or a premium bond account. Haine suggests keeping aside a bigger proportion of your regular expenses – closer to six to 12 months’ worth of outgoings. (Photo: Krisanapong Detraphiphat/Getty)

Figure out your financial goals

Is there anything you’re saving for in particular, such as buying a house, having a child or retirement? And how soon do you want access to your money? This can determine what you do with any money left over once any debts and emergency funds are covered. James Norton, head of retirement and investments at Vanguard Europe, says you should come up with a comprehensive plan outlining your goals – both short and long term. You might want to speak to a financial adviser who can give you advice tailored to your situation. (Photo: Getty)

Savings accounts

If you’re not sure what to do with your cash for now, you could put it into a standard savings account where there is no investment risk. The best easy access savings account is currently with Chip offering 4.7 per cent if there are no withdrawals. However, Batterbee says this is not the best option in the long term as it’s likely inflation will exceed any return you get in terms of interest – meaning your buying power is reduced over time. If you do decide to go for a savings account, Ms Haine says you should “act fast to lock in the best rate on an easy-access deal while you can” as savings rates are slowly decreasing. Remember not to stash too much in a regular bank or building society savings account as this could mean you breach your Personal Savings Allowance (PSA) – meaning you’ll have to pay tax on the interest you earn. Basic-rate taxpayers will reach their PSA with £1,000 in interest, while those paying the higher 40 per cent tax rate will see their allowance drop to £500. Additional rate taxpayers – those paying 45 per cent income tax on earnings above £125,140 – receive no PSA at all. (Photo: Nicholas T Ansell/PA)

Save on tax by using an ISA

It’s also worth making the most of ISA accounts. These accounts allow you to save up to £20,000 per year tax-free – and there are different types of ISAs to choose from depending on what your goals are. If you’re using a regular Cash ISA, the end of the tax year falls on 5 April so it might be worth maxing out the £20,000 allowance before the next tax year starts. Those saving for a deposit to buy a home might want to consider the Lifetime ISA (LISA), which allows you to deposit up to £4,000 each tax year and will give you a 25 per cent government bonus on your savings. It’s worth noting, however, that there is a withdrawal charge if you take the money out for anything other than buying a house or retirement. If you’re willing to take more financial risk, you could also open a stocks and shares ISA – which allows you to invest in funds, bonds and shares in individual companies without paying any tax on your returns. You can have different types of ISA accounts open all at once, but you won’t be able to deposit more than £20,000 a year across all of the accounts. (Photo: Roman Didkivskyi/Getty)

Another tax-free option?

You might also consider opening a premium bond account. Rather than earning interest or a regular dividend income, these accounts enter you into a monthly prize draw where you can win between £25 and £1m tax free. The prize fund rate is currently 4 per cent – so is it worth it? Haine says: “This rate is less than the top easy-access savings rates available right now and, remember, it is not a guaranteed return. But there’s always the chance of winning a prize.” (Photo: Peter Dazeley/Getty)

Consider investing

“If you’re able to commit your money for at least five years and are willing to accept the risk that comes with investing, it is worth investing in the stock market,” says Norton. Investing in shares has historically offered higher returns than cash or bonds over the long term – but you should be prepared to keep your money locked away for some time. Norton says you can reduce the level of risk by spreading your money across different assets, such as shares and bonds, and you can also diversify further by investing in different sectors and regions. One option could be to put your money into a stocks and shares ISA so you also benefit from not paying tax on your earnings. Remember, though, that your money is at risk when you invest and there is no guarantee of returns. (Photo: Marco VDM/Getty)

Give your retirement savings a boost

If you don’t need your windfall any time soon, you could also invest into your pension. Norton says: “You could spend two or even three decades in retirement, so the more you can contribute to your pension now, the better. Investing early on will let you harness the full power of compounding – when you earn returns on the money you invest as well as on the returns themselves.” As well as this, you’ll save on tax too because tax relief is applied to your pension contributions at your marginal rate of income tax. Essentially, basic rate taxpayers will have 20 per cent in tax relief added to their pot – meaning a 25 per cent increase on their initial contribution. Higher-rate taxpayers can claim back a further 20 per cent in tax relief, while additional rate taxpayers get an extra 25 per cent. Ultimately, how you spend a windfall will depend on your personal circumstances and the level of risk you’re willing to take. You may also want to spread your money across several different types of accounts. If you’re struggling, it’s worth speaking to a financial adviser who can look at your particular circumstances. (Photo: Nora Carol Photography/Getty/Moment RF)