Sunday, October 2

Christmas lottery. How to invest the prize and what taxes to pay

La Christmas Lottery will distribute up 3,600 million euros in prizes. Knowing how to invest this money, if it is earned, can make the difference between celebrating or regretting it.

A study by the European Financial Planning Association (EFPA) shows that 70 percent of winners of the Christmas Lottery have much less money five years after winning the prize.

“The euphoria that we get from being one of the winners leads us to make hasty and emotional decisions,” they point out from Abante.

In fact, we do not value the money that is the result of our effort and work the same as that which comes to us from a lottery prize or from an inheritance, he asserts.

Deposits and debts

To get the most out of the money, the Abante wealth advisory team recommends, as a first step, taking six months of time before you start spending or investing the money.

Second, analyze the current financial situation to see what the starting point is and if the extra money from the prize is enough or more is needed to cover the vital objectives and, therefore, to know whether to go to the financial markets to cover that deficit or, if it is the case, to see what profitability would need to be able to live on the income.

As a general rule, Spaniards are conservative. So the winner could be seen tempted to open a deposit or invest it in paid accounts.

From EFPA they advise, as a consequence of the rise in inflation, not to leave it in deposits and checking accounts.

Added to the low profitability they offer is that none of the products that exist in the market can beat inflation, so the real profitability that we would obtain (profitability minus inflation) would be negative.

Abante quantifies it. If you have 328,000 and are not invested, after 20 years and with an average annual inflation of 2 percent (objective pursued by the European Central Bank), that money would be equivalent to about 220,735 euros (current).

Another option that many of the winners turn to is the debt amortization, which is perhaps not the most convenient. This is because the winner must think that the first thing to see is whether the profitability of the money invested is greater than the cost of financing because, in that case, it would not be interesting to pay off the mortgage.

Also, it must be taken into account that, if the habitual residence was bought before 2013, there is a tax advantage in personal income tax (the law allows 15 percent of a maximum quota of 9,040 euros to be deducted each year), which may not interest to lose.

So what can the awardee do?

Discarding deposits and mortgages, the best option is to invest for retirement and long term.

For example, if you want to beat inflation by 3 points (that is, achieve an average annual return of 5 percent), you would have to invest in a portfolio with 50 percent of the investment in equities. And an option that allows diversification, that has tax benefits and that allows access to professional management are investment funds, they explain from Abante.

Saving for retirement would be one of the goals, especially if no such decision had been made before the award. A part could be dedicated to pension plans, but the limit to take advantage of the tax benefits has been reduced to 1,500 euros, which is why, as we said, the best option is offered by investment funds with a risky profile.

This does not mean that the entire award has to be placed on these types of products. You can diversify into equity, mixed or fixed income investment funds and also have part of the capital in liquidity to take advantage of the opportunities that arise.

Another possibility is changing the fund from more aggressive to less as we approach retirement age, reducing the risk. An operation that this type of product allows without tax cost.

The taxation of the award

But to be able to undertake these financial decisions, you should not forget to go to the cash register to pay taxes. You only have to pay if the prize exceeds 40,000 euros, remember from Abante.

This implies that, for a tenth, taxes would be paid for the excess if the ‘Gordo’ is played -which are 400,000 euros per tenth-, the second prize -125,000- and the third -50,000-, but they would be exempt from the fourth and fifth prizes, which distribute 20,000 and 6,000 euros to the tenth, respectively.

What remains unchanged is the percentage to be taxed, which continues to be 20 percent. That is to say, whoever has a tenth winner with the first prize, the net amount that they will receive in their account will be 328,000 euros.