Your Money: Windfall Special - How not to blow it

Speak to the experts and you will find there is no single answer to your financial questions. Simon Read asked three independent financial advisers what to do with pounds 5,000 in windfall shares and the deposit no longer needed to be left with the demutualising society once the windfall has been assigned

Pay off the overdraft, credit cards and loans

Robert Guy, technical director at the independent financial advisers John Charcol, favours first paying off debts.

Getting a windfall is is similar to someone getting an inheritance and I would suggest a client should follow the same procedure as they would if they had inherited a lump sum. The first thing to look at is short- term debt reduction, such as paying off an overdraft, or credit cards, personal loans or any HP agreements you may have.

That's a good use of the money as it will reduce your outstanding debts in the long term. Financially I think it make the most sense and means you'll be doing some some real good with your windfall.

If there is cash left over I would take a close look at a client's circumstances. I tend to take opportunities in tax relief order and would therefore look at pensions first. I would consider the scope of making a one-off payment into a pension to get the full tax relief, which would give a real long-term benefit from this windfall. Then I would look at Tessas and PEPs, for those people who are prepared to tie up the cash for any length of time.

Go for one of the remaining societies and hope

Simon Holt, managing director of Skipton Financial Services, independent financial advisers owned by the Skipton Building Society, also advises looking out for potential future windfall bonuses.

As a short-term investment I would recommend choosing one of the mutual building societies. A recent Which? survey highlighted the typically higher rates paid by the mutuals, and this would also give the opportunity for further windfall bonuses if the society subsequently demutualises.

For the longer term I would suggest considering the AIG Bonus Bond, which is a six-year investment with minimum guaranteed growth on maturity of more than 5 per cent each. The bond offers a maximum potential return of 16.25 per cent for each year that the FT-SE 100 index and the American S&P 500 index do no fall. There is a small initial charge of 2 per cent payable on the bond, but the combination of guaranteed returns plus potential of stock market linked extra growth makes the product suitable for a cautious investor. I would also recommend a look at PEP investments.

Despite some predictions to the contrary, the UK stock market has reacted favourably to the change of government. Although most PEPs are linked to the stock market, some providers, such as Legal & General, offer capital returns on their PEPs at the end of five years, with potential for real profit if the markets rise.

For those not requiring capital guarantees I would suggest a balanced- risk PEP such as the GT Income, which has an excellent long term performance record under the fund management of Nick Train.

Try an income bond for a long-term investment

Stephen Dight, an independent financial adviser with Grosvenor Financial Services of Henley-on-Thames, says any strategy he proposed would depend on the individual client.

If anyone had sold their shares then it would suggest they are a conservative investor. So I would suggest a strategy which broke down between long- and short-term savings. If they want fairly immediate access to their money then the building society is still a logical home.

It might be interesting to put the windfall cash in a few different building societies to have another go, as it were, at benefiting if any of them decide to go public. For that reason it does not make any sense to leave the cash in those building societies which have already issued their shares.

If a client was more interested in tying things up for a longer period I would suggest a guaranteed bond or income bonds or even National Savings. The bonds issued by insurance companies look good at the moment. Scottish Mutual, for instance, has just launched a 10-year bond which looks quite attractive.

If a client were to go the equity route I would suggest a PEP such as the Skandia Multipep because it divides the function between PEP provider and fund manager and therefore gives much more choice and spread over the investment funds available.

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