I won the lottery. What should I invest it in?
TRENDS I August 21, 2020
Once again, on 22 December, the most famous lottery in Spain will take up the front pages of newspapers. If you are one of the lucky ones who win the lottery, you are sure to wonder what to invest it in. And after this question come the doubts, such as how much does the Tax Agency take, can I collect my winnings from the lottery shop, or which is the investment that best suits me at this time. Before spending it all at once or quitting your job, we will answer some questions about how to collect your winnings, offering you some short and long term investment advice.
You have checked the number over and over again and yes, you have won the lottery. The first question arises in this point: when to cash in the ticket. You have three months to cash in winning tickets. Remember that if the prize is less than 3,000 euros, you can cash it in at any lottery shop. You can request this payment on the afternoon of the 22nd, once the winning numbers have all been verified. The time to do this is normally from 6 p.m. but this could be delayed a bit if any extra checks need to be done.
If your prize is equal to or more than 3,000 euros, you can cash it in at any of the authorised financial institutions, such as at a Banco Santander branch, or at the regional offices of Loterías y Apuestas del Estado. You do not need to be a customer of the bank to be able to cash your ticket in. You need to show the winning ticket and your national ID number to be able to collect your cheque for the winning amount. If the ticket belongs to several people, all of their ID documents must be presented.
Since 2013, winnings from prize draws and lotteries are charged a 20% tax. This includes all the prizes from Loterías y Apuestas del Estado, ONCE and the Red Cross draws. In 2019, the maximum exempt amount increased from 10,000 to 20,000 euros, and the Tax Agency keeps 20% of anything that exceeds that limit. This year, the amount will continue to increase.
This means that the Tax Agency will only keep 20% of the amount if you win the first, second or third prize, which are the ones that exceed 20,000 euros per ticket. The proportional part will be deducted at the time you collect your winnings. When filing your tax returns, you must indicate that you were one of the lucky winners of the Christmas Lottery.
Once you have cashed in your ticket, the basic advice is that you seek expert advice to decide what to do with the money. You should analyse the status of your assets and your short, medium and long term liquidity needs, as well as the risk you want to take on. The standard recommendation is that you first cover your immediate needs, that is to say, you pay your bills or fix that home appliance that you had forgotten about, but you can also splash out a bit. It's the time to buy that Christmas present that you have had your eye on. Once you have finished, it's time to decide what you want to do with your investment.
If your intention is to repay a loan or your mortgage with the money you won on the lottery, you first need to assess whether it's worth it. As stated by the European Financial Planning Association (EFPA), cancelling your debt is financially viable "as long as the cost, i.e., the interest rate, is higher than the return that another financial asset would give you". You must also check whether there are early cancellation costs or if you would lose out on tax benefits (in the case of a mortgage on a primary home taken out before 1 January 2013).
You can also allocate part of your winnings to save for your retirement. Pension plans and retirement plans are the alternatives. The former are less liquid (you can only withdraw the cash for certain contingencies), and the latter have a lower return. It also defers your taxation. Contributions made to pension plans can be deducted in your Tax Returns, but not those made to retirement plans.
Another product in which to invest your lottery winnings are investment funds. These are investment vehicles that cover the contributions from different savers who give professionals the power to make decisions about investing their equity.
The investment is made jointly in the assets that the management team consider suitable for getting the best possible return and based on a previously defined investment strategy. For example, you can opt for a riskier variable income profile or a more conservative fixed income. There is also the option of a mixed fund. These are exempt from taxation until they are redeemed.
More conservative profiles can opt for public debt. There are different types: treasury bills, bonds and obligations. Treasury Bills are short term debts issued with 3, 6, 9 and 12 month maturities; Government Bonds are intended for medium and long term investments, with 2, 3 and 5 year maturities; and Government Obligations are intended for long term investments (10, 15 and 30 year maturities). The Treasury website shows the characteristics and tax treatments for each product, as well as the auction dates.
Other alternative investments are bonds and shares. Bonds - buying debt from an issuer company or entity - are a good idea for people who have an aversion to risk and are intended for the medium or long term. Meanwhile, shares - buying a holding in a company - are aimed at people with a more aggressive investment profile. In this case, you won't know the return you will get until you send your shares, whilst the interest from bonds is set in advance.
You can also invest your money from the lottery in non-financial assets, such as property. The options range from new-builds to premises, garages and second-hand house.
Another asset to be considered, which has a more stable price, is gold. It is completely liquid, since you can sell it at any time, and it is exempt from VAT (when buying), provided that it is in gold ingots and coins. However, bare in mind that it's high point has passed and you must have a safe place to keep it.
There are many options for investing the money you won on the Christmas Lottery that are suitable for all types of investors. Take advice from experts are take your time to make the decision to ensure that your investment has the highest return possible for you. That way, you will be able to enjoy financial peace of mind for as long as possible. Something that your long term finances will thank you for.
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