What to do with pension lump sum

dunstonh

I am surprised no-one has suggesting bunging the lot (+ a mortgage) into a BLT property which "should" protect against inflation and provide an income in future years when I would most need it. No doubt BLT is being hotly debated elsewhere on the site.

because you cannot thankfully.

So you can choose to just take the interest rather than income (ie selling units)?

Depends on how you invest. An investment that has the income factored into the unit price will see units encashed. An investment that distributes the income can then have that income paid out or subsidise towards a larger amount which still involves some encashment of units or you can draw less than the income if you dont need to draw the full yield.

At the end of the day it doesnt really make that much difference. Its a bit like 100x20 or 20x100 gives the same answer. If income is put back into the unit price (like acc units) then the unit price goes up quicker than the income unit price. If you then cash some units you lower the number of units held but the unit price has gone up to compensate. So you may start out with 1000 units at 100pence and end up with 500 units at 200pence but the value is still the same (assuming you just drew the growth). Some people worry that you will end up with no units. However, as the unit price goes up, you dont need to encash so many units.

The only drag can be that if your investments take a big hit and you continue to draw at the same rate. e.g. if you had £100k and you are drawing £5000 then that is 5% and natural yields can fairly easily take care of that. However, lets say you went 100% stockmarket (rarely a good idea) and you suffered a 40% loss. Your £5000 a year on a now £60,000 fund is 8.33% of the value and thats harder. Not impossible for a long term average but it typically means that you are drawing some of the capital growth that occurs in the recovery making it nearly impossible to recover back to the £100k. Then along comes another drop in the future (lets call the first one tech stocks and this one credit crunch ) and your fund value that managed to get back to £80k has been hit with another 40% drop and is now £48k. So, your £5000 withdrawal is 10.4% p.a. of your value. You are now going to see it very hard to keep up and the risk of capital erosion and running out of money is significant. If you then panic and buy an annuity you are buying it with £48k and not £100k although you are older so should get better annuity rates. Or you can cut back your income and wait for some recovery (may not be ideal to do that). Or you may hit 75 at the wrong time and find you have no real choice but to buy the annuity (hence recent calls to suspend the age 75 forced annuity purchase).

That will probably take reading a couple of times to understand but it is one of the major risks of drawdown.

That said, sensible investing coupled with sensible levels of withdrawals should go someway to reduce the risk. If you have other sources of income in retirement as well, then it can be a good thing.

EdInvestor

Do you have the choice as in the UK of 'income' or 'accumulation' funds?The former separate out the income and pay it to you, typically quarterly.The latter reinvest it, so to realise your income , you would need to cash in part of the fund.Either method can be advantagous to different kinds of taxpayers here, so they offer both.

Bonds funds are almost always in the 'income' category while equity growth funds are typically always accumulation, as any dividends are pretty small.

But property funds,equity income funds and mixed funds will usually offer either style . It may be importnat to see where they deduct charges - if off the income, then it can be expensive if the charge is 1.5% .But at least you can see what's what in terms of income vs capital.

jamesd

Orwell, since it is a lump sum you could take the BTL route but if you're serious about that you'd do it with an interest only mortgage for each property that has interest costs which you can deduct from the rental income before tax. The mortgage can be either on the rental property or your own home, up to the purchase price of the properties combined. Do be sure to diversify property types and locations, another reason why mortgaging is useful: it lets you afford more than one property. Also remember that you make the money mostly by buying at the right price.

It's not a particularly bad thing to do with a portion of the money.

In your case traditional pension income drawdown doesn't apply, I just used it as a shorthand for taking income from investments.

I'm not greatly keen on an annuity for you because you're simply too young to get good annuity rates. That makes it easy for other options to beat annuities for income for you today. Add in the quire reasonable pension, the plan to work and wife's income and you seem well placed to accept the relative uncertainty of non-annuity options.

With some nice options potentially available to you, but some available only via an IFA, that seems like a good step. At least for the annuity part if you do decide to go for that, so you can be sure you get the best deal. Commission will pay the cost of that bit of advice.

Orwell wrote: »

Surely if I am not converting it to a lifetime income I might as well take it out tax free?

Yes. Drawdown was just used by me as shorthand for taking income from investments.

EdInvestor

Orwell:

Letting income is taxable, so not ideal in your situation.

Jennifer_Jane

EdInvestor wrote: »

Do you have the choice as in the UK of 'income' or 'accumulation' funds?The former separate out the income and pay it to you, typically quarterly.The latter reinvest it, so to realise your income , you would need to cash in part of the fund.Either method can be advantagous to different kinds of taxpayers here, so they offer both.

Bonds funds are almost always in the 'income' category while equity growth funds are typically always accumulation, as any dividends are pretty small.

But property funds,equity income funds and mixed funds will usually offer either style . It may be importnat to see where they deduct charges - if off the income, then it can be expensive if the charge is 1.5% .But at least you can see what's what in terms of income vs capital.

No, not able differentiate. So the value of your fund has decreased (current situation, despite having a mix of funds within and the money in two different fund of funds anyway) = less income. Glad I don't have to rely on this for my pension.

Thanks to you and Dunstonh for replies. Would I do it again? Yes, but not in the first fund with first IFA. But I will convert to an ordinary annuity when the funds have recovered their value. It sounds as if there is less risk in the UK equivalent, so although they are very similar (as are a lot of UK and South African insurance-based products), there is a key difference.

Thanks
PS - sorry to go off-topic.

Orwell

One point about annuity rates being low for someone my age. They are simply based on how long you might expect to live for, so being lower if you would get the money paid for longer.

I can't see how they are better "value" later, since you get the money for less time (i.e. I think they are the same value over a lifetime whatever age). The only reason to defer (that I can see) is to wait until you pay lower tax, or allow the investment to grow by taking risks with it.

With a large lump sum, beating inflation without taking risks is quite hard unless you really know what you are doing in the stock market. Each time I have tried that route I have ended up losing large amounts.

Any thoughts on postcode rated annuities? Because these are starting to happen and I live in a area with about the longest life expectancy in the UK although I don't think I will be one of them - but I will lose out if rated by postcode.

jamesd

The annuity value problem comes from it being easier for other things to beat them when they are only paying 4%. With 7% and 6% from structured products and 5% from some of the most popular funds in the UK it's not hard to beat the annuity.

When you lost money in the stock market were you using shares or funds?

dunstonh

I can't see how they are better "value" later, since you get the money for less time (i.e. I think they are the same value over a lifetime whatever age). The only reason to defer (that I can see) is to wait until you pay lower tax, or allow the investment to grow by taking risks with it.

Higher fund value, perhaps greater chance of enhanced annuity rate, longer death benefits potentially possible, potentially less tax.

With a large lump sum, beating inflation without taking risks is quite hard unless you really know what you are doing in the stock market. Each time I have tried that route I have ended up losing large amounts.

The only real reason you would have lost money on the stockmarket is if you keep entering when its high and pull out when its low and dont rebalance in between. You wouldnt build a drawdown portfolio with 100% stockmarket anyway unless you are pretty gung ho. You can also use other investment products that offer some capital guarantee. Getting over 7% p.a. on structured products is possible at the moment. They can be held in a SIPP. You can mix and match to suit your needs.

Any thoughts on postcode rated annuities? Because these are starting to happen and I live in a area with about the longest life expectancy in the UK although I don't think I will be one of them - but I will lose out if rated by postcode.

Most providers include them. They dont give you a lower rate. They only enhance, not take away.

To be honest, you really need to see an IFA as this is a once in a lifetime decision and you need some clarity of the options available. We dont have the full info here and its a bit scattergun.

Orwell

Yes, although last time I took IFA advice, I was recommended to buy funds which subsequently lost 90% of their value and have never really recovered.

I seem to do worse in funds than stocks that I choose myself. But I have started to buy funds in the SIPP and the Corporate Bonds funds are going well.

The main problem is time, ironically if I ever did retire fully I could spend time researching this stuff, which is so much easier to do than it used to be.

Orwell

dunstonh wrote: »

Most providers include them. They dont give you a lower rate. They only enhance, not take away.

Hmm, insurers giving away money - now that would be a first. Differential annuity rates produces winners and losers - it has to.

How long will it be before insurers are forced to penalise men in order to give more to women of the same age (to equalise annuity rates despite different life expectancy)?