What To Do With An Inheritance Or Lump Sum In Australia
Receiving an inheritance can change your financial future.
Receiving an inheritance or other significant lump sum can be both exciting and overwhelming. Whether the money comes from an estate, the sale of a property, a business, a compensation payment or another major financial event, deciding what to do with it can have long-term consequences.
You may be wondering: Should I invest it, pay off debt, contribute to super, buy property, keep it in cash or simply do nothing for now?
There is rarely one answer that is right for everyone.
At Barwon Financial Planning, we help clients make informed decisions about significant lump sums by looking beyond the money itself and considering what they want their wealth to achieve.
Start with the goal, not the investment
An inheritance can provide an opportunity to significantly improve your financial position. However, the best strategy depends on your circumstances and what you ultimately want the money to do.
For some people, the priority may be to:
Improve their retirement position.
Reduce or eliminate debt.
Purchase or upgrade a home.
Generate additional income.
Build long-term investment wealth.
Provide financial security for their family.
Fund travel or other lifestyle goals.
Protect and preserve the inheritance for future generations.
Create greater financial independence.
Our role is to help you understand your options and determine how the lump sum can be incorporated into your broader financial plan.
Where should an inheritance or lump sum payment be held?
One of the most important decisions can be where the money should ultimately be held.
Depending on your circumstances, we may consider whether capital is best held or invested:
In your personal name.
Through a superannuation account.
Within a family trust.
Through a company structure, where appropriate.
In an investment property.
In a diversified investment portfolio.
In cash or term deposits.
Or through a combination of these.
The decision isn't simply about which structure has the lowest tax rate.
We consider the interaction between tax, investment returns, accessibility, asset protection, Centrelink considerations, estate planning, control and your personal objectives.
Example: Deciding where to invest an inheritance or lump sum payment
Imagine you receive a $500,000 inheritance.
It may initially seem obvious to invest the money in your own name. However, depending on your circumstances, we may also consider whether some of the capital could be better positioned within superannuation, whether debt reduction provides a superior risk-adjusted outcome, or whether a combination of investments and cash reserves better supports your goals.
Superannuation may provide attractive tax advantages, but it also has restrictions around access and contribution limits. A family trust or company may provide different taxation, control and estate-planning outcomes, but also involves additional complexity and costs.
The right structure is not determined by the size of the inheritance alone. It is determined by what you need the money to achieve.
Frequently Asked Questions
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A $500,000 inheritance can materially change your financial position, but there isn't a single "best" way to use it. The right approach depends on your age, debt, existing investments and superannuation, income needs and future goals.
Rather than immediately investing the money, consider how much you may need for short-term security, whether reducing debt makes sense and how the remaining capital could be structured for long-term wealth creation or retirement.
The key question isn't ‘Where should I invest $500,000?’ - it's ‘What do I want this $500,000 to achieve?’
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Superannuation can be an attractive home for part of an inheritance because of its concessional tax environment and potential role in building retirement wealth. However, you generally can't simply deposit an unlimited amount into super.
Contribution caps, your existing super balance, age and access requirements all need to be considered. For some people, contributing part of an inheritance to super may be highly effective; for others, retaining capital outside super provides greater flexibility.
The important consideration is not simply whether you should put your inheritance into super, but how much, when and whether super is the right structure for your particular goal.
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For someone receiving an inheritance while carrying a home loan, this can be one of the most important decisions to make.
Paying down the mortgage provides a certain benefit by reducing future interest costs, while investing the money creates the potential for greater long-term growth but introduces investment risk and volatility.
The right decision depends on factors including your mortgage interest rate, investment timeframe, tax position, risk tolerance, cash-flow requirements and broader financial goals.
Sometimes the best answer isn't all or nothing — a combination of reducing debt, retaining cash and investing the balance may provide the best overall outcome.
When Barwon Financial Planning can be particularly valuable
We believe our approach can be particularly powerful when an inheritance or lump sum materially changes your financial position but you aren't sure what you want to do with it yet.
For example, you may have spent years building your financial position around a particular income and asset base. Suddenly receiving $300,000, $500,000 or $1 million can change what is possible.
Rather than simply asking "Where should I invest this money?" we believe the more important question is:
"What could this money allow me to achieve?"
From there, we can work backwards.
Perhaps the inheritance means you can retire earlier.
Perhaps you can eliminate your mortgage and redirect future cash flow toward investments.
Perhaps you can increase your retirement income.
Perhaps you can help your children without compromising your own financial security.
Or perhaps the best decision is to do very little initially while you consider your options.
This is where comprehensive financial planning can add significant value. We can model the alternatives and show you how different decisions could affect your wealth, cash flow and retirement outcomes before you commit your inheritance.
Our objective isn't simply to find somewhere to put the money. It is to make sure the money has a purpose and is working towards something important to you.
Received an inheritance or significant lump sum?
Talk to Barwon Financial Planning about how it could fit into your broader financial plan.