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Prize draw tax implications

I've just had some great news. Apparently I have "come through the first 2 rounds of a draw for a Double First Prize" for the latest Which? prize draw. I now need to decide whether to choose a first prize of

300,000 or a guaranteed lifetime income of 1,800 per month. Does anyone know the tax situation regarding such prizes? Are both options taxable, neither option taxable, or one taxable and not the other?

If neither option is taxable and if you want income to live off then the 1,800 for life is probably better for someone who is 40-ish. The very best one could manage with 300K is probably 5% per annum of income that keeps up with inflation (assuming inflation remains low), i.e. an income of 1,250 per month which would be taxable (although some or most of the tax could probably be avoided via personal allowances, ISAs and income from UK dividends incurring no additional tax for a basic rate tax payer). If that is so then a prize of 1,800 per month tax free could be used to give a starting income of 1,300 per month with 500 per month left over for investment to boost the income in future years to keep pace with inflation. I suppose the other issue is just how "guaranteed" is that 1,800 per month? What if Which? went bust? Do they buy a lifetime annuity for the prize winner, in which case I suppose the guarantee is pretty solid.

So, my 2 questions:

1) What is the tax treatment for the alternative prizes? 2) Is the 1,800 per month for life implemented via an annuity?

Finally, to all you other 4,999,999 people who got through the first

2 rounds of this draw, please don't send in your forms because I could really do with winning this one! Thank you.

Julian

Reply to
Julian
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I don't know the ins and outs of tax on taking the income option but I'm pretty sure the lump sum is supposed to be tax free. Of course, what you do with it will have its own implications.

I'm 40 and if it were me I'd take the 300k and put it in the stock market. Pick a few blue chip (and fairly safe) stocks with a reasonable dividend (5%?) and then enjoy capital growth of perhaps 10%ish averaged over the years. Remember that as the capital grows your income will grow too, assuming the yield remains the same.

On the basis of 10% compunded annual growth and income of 5% each year this is what the first 10 years might bring....

Year Capital Income 1 300,000 15,000 2 330,000 16,500 3 363,000 18,150 4 399,300 19,965 5 439,230 21,962 6 483,153 24,158 7 531,468 26,573 8 584,615 29,231 9 643,077 32,154 10 707,384 35,369 11 778,123 38,906 12 855,935 42,797 13 941,529 47,076 14 1,035,681 51,784

The other thing to consider is estate planning. Would you rather your dear ones benefited from the lump sum or ended up with sweet F.A.? Obviously the figures are just examples but the stock market has plenty of headroom to recover to the levels of three years ago and continue beyond. I'd far prefer seeing my bank balance of 1m in 14 years rather than waiting for another monthly cheque for 1,800, which will be worth what by then once inflation has eaten into it?

Cheers, Another hopeful!

Reply to
Tiny Tim

Yes. This is exactly what I would do with the lump sum, although my thinking re the future is different. The capital growth is irrelevant to me. I would aim to pick strong income generating stock with a history of increasing dividends so as to expect an average annual dividend increase of at least inflation. If that condition is met then the income stream from the initial investment keeps pace with inflation and the capital value is irrelevant. Having said that, in a rational market if a share is yielding 5% today then if in 10 years it is still yielding an inflation-adjusted

5% then the capital value will have to have increased otherwise the future yield would look crazy.

Very good point. I hadn't considered that one. I think you've tipped the balance in favour of the 300K lump sum.

Oh no!!!! I thought I was the only one.

- Julian

Reply to
Julian

In message , Julian writes

Well I got one and read it. The lump sum aint taxable but the income is.

Reply to
john boyle

Thanks. I guess there's more detail in the next mailing which I have yet to receive. So far I just have 2 postcard-sized pieces of paper. Sounds like the 300K is definitely the one to go for.

- Julian.

Reply to
Julian

If you multiply £300k by the chance of winning it I suspect it's less than the value of the time you've spent deciding :)

Reply to
Stephen Burke

There is no tax relief available on the processing fee for finding out that you haven't actually won anything.

Reply to
Jonathan Bryce

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