Cornerstone — Edition 09
What To Do When a Large Amount of Money Arrives Unexpectedly
An inheritance. A retrenchment payout. A significant bonus. A property sale. A business exit. Each arrives differently, in different emotional contexts, with different tax implications and different time pressures.
But they share one defining characteristic: the pressure to do something with the money immediately.
That pressure is almost always counterproductive. The correct first move when a large sum arrives — in almost every circumstance — is to pause.
Before making any investment decision with a lump sum, park the money in a money market account or high-interest savings account for 90 days. Do nothing else with it.
This is not procrastination. It is one of the most evidence-based strategies in behavioural finance. Studies consistently show that investment decisions made under emotional pressure — grief after an inheritance, anxiety after a retrenchment, excitement after a windfall — produce materially worse outcomes than decisions made in calm, deliberate conditions.
The money market account earns a real return during the 90 days. You lose nothing except the theoretical gain of having invested immediately — which, over 90 days, is negligible.
What you gain is time: time to assess your tax position, time to consult an adviser, time to decide without the emotional static of the triggering event.
The 90-day rule does not apply to urgent debt reduction — if you are carrying high-interest consumer debt, eliminating it immediately is almost always the right decision. And it does not apply to retirement fund decisions with hard legislative deadlines. But for the investment portion of any lump sum, 90 days of patience is almost always worth more than 90 days of urgency.
Inheritance
Arrives in the context of loss. The financial and emotional timelines are rarely aligned — the money requires decisions at exactly the moment when clear thinking is most difficult.
The 90-day rule applies strongly here. Grieve first. Decide later.
Retrenchment payout
Arrives with financial pressure and a hard deadline on the retirement fund decision. The most consequential lump sum most people will ever receive.
The retirement fund decision cannot wait. Everything else can.
Bonus
The most psychologically straightforward lump sum — arrives without grief or job loss. Also, for this reason, the most frequently spent entirely on lifestyle.
Apply the split formula before the money arrives in your account.
Property sale or business exit
Often the largest lump sum a person ever receives. Both carry significant capital gains tax exposure that should be understood before the transaction, not after.
CGT planning happens before the deal is signed, not after.
An inheritance is typically received either as cash, as an investment portfolio, or as property. Each has different implications.
Cash is straightforward — the 90-day pause, then a deliberate allocation aligned with your existing financial plan: retirement gap, TFSA, discretionary investment, debt.
An inherited investment portfolio requires a decision about whether to retain the underlying investments or restructure. Capital gains tax is triggered on disposal — but the base cost of inherited assets is the market value at the date of death, which may limit CGT exposure if the portfolio is restructured shortly after inheritance. Verify this with a tax professional before selling anything.
Inherited property requires a decision about whether to sell or retain. If sold, CGT applies on the gain above the base cost. If retained as a rental, rental income is taxable and the property must be maintained and managed.
One thing to avoid: spending an inheritance before it has been received and quantified. Estates can take one to three years to wind up, and the final amount can differ materially from the initial expectation due to estate costs, debts, and disputed claims.
A retrenchment payout typically includes two components: a severance payment and a retirement fund payout. These are taxed differently, and the retirement fund decision has a deadline that cannot be missed.
Severance payments and the retirement fund portion below are both taxed under the same retirement lump sum tax table — and they draw from the same combined lifetime exemption, currently R550,000. This is not two separate allowances; it is one pool shared across every retirement fund lump sum and severance benefit you ever receive. If you have previously withdrawn from a retirement fund or received a severance payment, less of that R550,000 may remain available now. SARS applies this cumulatively and automatically, but it is worth confirming your remaining balance with your fund administrator before assuming the full amount is untouched.
The retirement fund portion carries the most important decision. You have three options:
Worked example: An operations manager, retrenched at 52 with R650,000 accumulated in her provident fund and 13 years to a planned retirement at 65.
Cash out: R100,000 is taxable above the R550,000 exemption, taxed at 18% = R18,000. Net in hand: R632,000.
Preserve: the full R650,000 transfers tax-free and compounds at 9% to age 65: approximately R1,992,773.
Even if the after-tax cash were invested elsewhere at the same 9%, it would grow to only R1,937,589 — a R55,184 shortfall, purely from the tax paid on day one. This isolates the actual cost of cashing out: not the spending temptation, but the tax you hand over immediately and never get to compound.
Act on the retirement fund transfer within 90 days of leaving employment — delays can complicate the process and some funds have administrative deadlines that cannot be extended.
See what the retirement fund portion of a retrenchment payout is actually worth to you, taken in cash today versus transferred tax-free into a preservation fund.
Illustrative only, using a fixed 9% annual growth assumption and current SARS retirement lump sum tax brackets. Your actual tax position depends on your full retirement fund history and other lump sums received — speak to an adviser before making this decision.
A bonus is the most psychologically straightforward lump sum because it arrives without grief, without job loss, and without urgency. It is also, for this reason, the most frequently spent entirely on lifestyle.
Apply the split formula before the money arrives in your account:
50% to financial foundation. Retirement top-up, TFSA contribution, emergency fund, debt reduction.
30% to a medium-term goal. A home deposit, a planned purchase, a career investment.
20% to lifestyle. Guilt-free, because the foundation has been addressed first.
One specific application worth highlighting: making an additional lump sum contribution to your retirement annuity before the end of the tax year. If your regular monthly contributions have not reached the 27.5% deductible limit, a year-end bonus contribution reduces your taxable income for that year — effectively receiving a portion of the bonus back as a tax refund. The deductible portion is not a cost. It is a transfer from SARS to your own retirement account.
A question that arises with every significant lump sum: should it be invested all at once, or phased in over time?
The evidence is clear and somewhat counterintuitive. In approximately 70% of historical market scenarios, lump sum investing outperforms phased investment because markets trend upward more often than not, and every month of delay is a month of potential growth missed.
Phased investment performs better in the remaining 30% of scenarios — primarily those involving a market decline shortly after investment.
Phased investment is therefore a psychological hedge more than a financial one. If the prospect of watching a large sum decline 20% in the first six months would cause you to sell, phased investment preserves your ability to stay invested — which matters more than the theoretical return advantage of investing immediately.
The one question to sit with
If a significant sum arrived in your account tomorrow — inheritance, retrenchment, bonus — do you have a clear plan for what you would do with it? If not, the best time to build that plan is now, before the emotional context of a lump sum makes clear thinking harder.
Worth reading
The Psychology of Money
Recommended in Edition 01, and worth a second mention here because no book better addresses the emotional dimension of financial decisions under conditions of unexpected wealth. The chapter on wealth and luck is particularly relevant for anyone processing a significant inheritance or windfall.