Australia’s Powerball has jackpotted to $150 million. A personal finance expert shares the smart thing to do if you win.
Australia’s Powerball jackpot has soared to a staggering $150 million but even that much cash mightn’t last a lifetime.
Lottery winners aren’t immune to financial pitfalls that devastate their fortunes, and there are many unsavvy ways to spend big.
Some studies have, ironically, found lotto winners are several times more likely to file for bankruptcy than the average punter. The odds of losing it all is pegged at between 30 and 70 per cent.
Personal finance expert James Wrigley has shared how to avoid those mistakes and, after winning the Powerball, secure yourself wealth for life.
Mr Wrigley, of First Financial, said many lottery winners pandered to their desire for luxury goods, the value of which will usually only depreciate.
In fact, he warned against dipping into your winnings at all, unless it’s to buy a roof over your head.
“The thing that catches out a lot of lotto winners, elite sports people and all the rest, is that they go spending the capital,” he said.
“You do not want to go falling into the trap of spending the capital on cars and luxury goods.”
So, what should you do instead?
Step 1, buy a house
Firstly, Mr Wrigley said, lottery winners should buy a home in their own name. This will mean you have a roof over your head if times get tough and, in Australia, its value is likely to climb.
If you win big, you should be able to buy yourself that security mortgage-free.
Share the winnings with family
Next, Mr Wrigley said many lotto winners will want to share their good fortune with family, particularly children.
He recommended you do so, but not in the way you might think.
Mr Wrigley advised against handing over cash gifts and suggested winners instead put the money in writing as a loan.
“Make sure you document that money as a loan. It will help you and them if something happens to them,” he explained.
The money can then be “called back in” if its recipient falls into financial trouble.
“You take that money back out, they can sort themselves out and then loan the money to them again later on,“ he said.
Spend it on super
Lottery winners will also want to maximise their deductible super contributions to reduce the hefty taxes that can cut into their new income.
“This is all about tax,” Mr Wrigley explained.
“Your superannuation fund will pay a maximum rate of tax of 15 per cent on the earnings. The money that you receive from winning the Powerball is tax-free but any earnings you make on that is taxable income. Superannuation is going to be your lowest tax environment.”
While you won’t be able to access the money until after you turn 60, the nest egg will be waiting for you, tax-free, in retirement.
“Most people will make it to 60 to benefit from tax-free super,” Mr Wrigley said, adding that “if you’re generous”, you can also help do this for your children and loved ones.
Set up a charity fund
Mr Wrigley also recommended gifting some of the money to charity, not only because it’s generous but because there are financial benefits.
He suggested winners create private ancillary fund — a pool of money that is managed or held to make distributions to other entities. Any of the money you put in will count towards your tax deductions.
“This money that you put into the private ancillary fund is a tax deduction for you,” he said.
“So, if you put $50 million into here, you get a $50 million tax deduction that you can carry forward to offset against income that you earn from all of these other sources.”
The fund will also help you to give to charities “in perpetuity”, Mr Wrigley said.
“Rather than just giving away a lump sum of money, you can invest that lump sum of money and give the income to those charities over and over and over,” he explained.
Put the money in a family trust
Finally, Mr Wrigley suggested creating a family trust to make your winnings last “forever and ever”.
“The income you earn from that trust is your spending money,” he explained.
“You can spend the income from these investments year after year after year.”
Family trusts have many tax benefits, particularly if there are many beneficiaries.
The trust itself does not pay tax — instead, beneficiaries pay tax on the amount they receive.
This means, if you spread the total income across multiple people (like your partner or children), you can try to keep their taxable income below a certain threshold. This lowers tax compared to if one person were being taxed the highest rate of 47 per cent.
You can also use a “spillover company” or “bucket company” if the income is too great to push out to your beneficiaries, Mr Wrigley said.
“This company will pay a maximum rate of tax at 30 per cent,” he said.
Source: news.com.au
