What you don’t realise about winning the lottery

Winning the lottery is something many of us daydream about. Edmund Greaves, editor of Mouthy Money, considers some of the implications of actually hitting the jackpot.

Do you daydream about a big lottery win? I must confess, despite supposedly being sensible about money, I do.

I even bought a couple of lines for Tuesday’s Euromillions, a reported £140 million bumper jackpot. The fact you’re reading this tells you how that went for me! No one seems to have won, so Friday’s is set for a whopping £158 million.

This column isn’t going to get into the weeds of the odds of winning. We all know its miniscule. We all know it’s a bad use of money that could be generating gains in an ISA etc.

But my personal rule of thumb is it’s fine to do occasionally, and the daydreams are fun too.

I can tell you the contents of my daydreams: I don’t think too hard about the travelling which I’d definitely do (overlanding across Africa in a Toyota Land Cruiser with a rooftop tent), or the nice car I’d probably buy (the Toyota Land Cruiser).

Instead, the thing that gets me dreaming is the dream home I’d buy. I can tell you, with £140 million in the bank, I’d have a nice country manor somewhere in the South West, and probably a nice modern flat somewhere central in London, have to have somewhere to crash after a night at the opera.

But that’s just me.

These daydreams have always progressed into my nerdier financial journalist proclivities though. I start thinking about the practicalities of the whole thing.

Surely that much money would start attracting a lot of tax? My £20,000 annual ISA allowance is suddenly going to start looking a bit…pathetic.

So how do you go about planning for all that money?

I actually got in touch with Allwyn UK, the company which recently took over the running of the National Lottery. Unfortunately, at the time of writing, they have not provided me with any insight about their process when it comes to lottery winners.

I would imagine they do offer winners financial advice and pastoral care. This kind of life changing event can have all sorts of untoward effects.

Fortunately instead, I was able to speak to Duncan Horner, a director at Amber River Premier, part of Amber River Group, one of the UK’s largest IFA firms.

The team there has a great deal of experience looking after high-net-worth (HNW) clients, and indeed has in the past looked after lottery winners. The firm also has experience managing the finances of people who have exited multi-million-pound businesses which have led to major financial windfalls.

Duncan really drove home for me in our chat (which you can catch now on the podcast) actually that winning the lottery isn’t exactly the easiest thing in the world to have happen to you. The daydreaming is all well and good, but the practicalities and implications of winning a life-changing amount of money are pretty vast.

Aside from all the family members and ‘old friends’ who pop out of the woodwork – winners become subject to actual press intrusion. There is a real vulnerability to winning in that sense. Indeed, Duncan told us that a lottery winner client would be considered a vulnerable client from day one.

There’s an often-quoted figure that 70% of lottery winners go broke. Although the research on it is patchy, around one in three (33%) actually declare bankruptcy, according to a financial planning body in the US, the CFP Board of Standards.

And who hasn’t come across a schadenfreude-laden story in one of the tabloids about a lottery winner gone bad?

This I would argue comes not from an inherent weakness in the winner, but the fact that dealing with such an extraordinary change in their financial situation is transformational – and not always in a good way.

At the outset it is likely to generate a lot of paperwork and planning. From a will to trusts, to powers of attorney, all these things need doing. Picking an adviser that is trustworthy and working in your best interests seems a pretty good first move.

Duncan also pointed out winning £5 million is very different to £150 million. These days the former is going to probably ensure you’re ‘set for life’ and can probably manage most of the tax implications with allowances and other normal things that come with financial planning.

Although we’re not talking about the vast majority of Brits, having a £1-5 million estate is not madly unusual these days once you factor in things like property prices, pensions and other assets that well-paid professionals accrue over a career.

£150 million is a different kettle of fish entirely. Managing that kind of sum is a generational endeavour that requires serious planning and even the creation of teams to tend to it for you.

A winner would likely need to engage accountants, financial advisers, lawyers, and all other manner of professionals just to manage the most straightforward aspects.

Set for life?

What a plan looks like will vary on individual’s needs and wants but as Duncan points out in the podcast, people tend to have a ‘fun money’ fund at the start. Then the business of deciding what set for life looks like comes.

The implications for all sorts of things become very weird and interesting. There are not enough banks in the UK to cover financial services compensation (FSCS) deposit guarantees, for instance, so this money will invariably have to be invested straight away into (relatively) safe things such as gilts.

Inflation becomes an instantaneous worry too. 2% inflation seems not a huge deal but 12 months of that for £150 million? You’re talking £3 million of value down the drain in one year unless you have that money growing from day one.

I know this is all very pie in the sky stuff, because most of us will never even come close to considering the implications of winning the jackpot.

My takeaway to this is though, that daydreams are great – but the realities of it are quite different when you really think about it a bit harder. And from the extremities of something like a lottery win we can learn a bit more about some of the common pitfalls of building wealth over a long period of time, and then what we do with that wealth once it is accrued.

When all is said and done, total financial freedom comes with strings attached that will follow you the rest of your life. And it may follow your kids too, you better hope they don’t descend into the depths of trustafarianism.

While most of us will never reach those heights, many of us will do the right thing and build a lifetime of wealth into something we can retire with. Hopefully by thinking about some of the problems people can face when they sit on a big sum, we can consider some of the things right in front of us that are more important than money, and what we truly value in our lives.

Finally, remember that playing the lottery can be a fun activity, but ultimately it is a form of gambling. Personally, I’m not shy of having a very occasional flutter but spending lots of money on it regularly isn’t a good idea.

Please visit gambleaware.org for more information on gambling addiction and how to deal with it if you find yourself or a loved one struggling with it.