Small pension and about to be made redundant

Saramago

Hi,
I need advice as to how to sort out my future financial prospects. I am single female, 57, about to be made redundant from a £43K salary.
My personal pension fund is £103K at the moment, I have about £45K in various ISA’s and saving accounts and about £450K worth of a house.
Generous redundancy settlement is to be about £48K which I will receive at the end of May.
I have fully paid up state pension, but I will not be able to draw on it for another 5 years.
I am trying to decide how to best maximise my income in the forthcoming years as I don’t hold much hope of any meaningful employment.
I also need to work out what is the best way to maximise my redundancy payment.
I was thinking of persuading the employer to pay anything over £30K (which is tax free) into my pension found which I could then draw out as a tax-free sum. That will provide me with a small pension of about £400 a month. The cash and saving will then amount to close to £100K. Will this be enough to provide me with another £500pm income? I was thinking that in the next few years I might find some freelance temp work to bring my income to some £1500 per months and then when the state pension kicks in I will have that to relay on.
Sad and scary future for someone who worked hard last 30 years and brought up a PhD daughter, but it could be worst.
Any advice, tips or warnings gratefully received.

tocsin

I took early retirement (redundancy, but an immediate pension payment) a year ago, and put all the lump sum over the higher rate tax level into a SIPP - that may be an option if you don't get a deal from your employer.

Two good reasons for me doing that - get the maximum tax relief, and have something to do managing the investments.

If there's time, get some advice from an IFA - I'm surprised none have replied yet

Saramago

Maybe my question has too many questions in it? And too many details?

I am new here, should I post one in the redundancy folder and the other here?

I have 3 months to sort it out the best I can.

tocsin

I would say that you have the right questions and information, just I'm not qualified to give advice - or that my advice would be worth what you've paid for it

But I'll have another go, anyway...

If possible, defer drawing the pension - it will be worth more the later you start. If that's not possible, consider "drawdown", where you take a lump sum and then income from the pension pot, but the capital stays invested (and hopefully still growing). These options definitely need an IFA to crunch the numbers.

Also, don't feel bad about claiming JSA - you're entitled to it if you are looking for work.

Hope that helps, and you get some more replies!

jamesd

Saramago, you can recon on getting about 5-6% of capital as income each year if you use investments in a S&S ISA or investments instead of annuity purchase for your pension pot. £100,000 in S&S ISA as soon as you can get it there to save tax and the remainder outside the S&S ISA and taxable should be able to get you that £500 a month that you're after.

If you're not familiar with putting together investment mixtures you should visit unbiased.co.uk and find a local IFA who can help you to put together a suitable combination.

If you do buy an annuity don't buy it directly from the place where your pension money is invested, instead ask an IFA to find you the best deal. It's almost always the case that the IFA can find a better deal that pays out more. The IFA can also check your health for things like heart trouble, smoking, being overweight or many other things that could make you eligible for an enhanced or an impaired life annuity that would pay more than a standard annuity.

You might also consider whether you need the house or could do better by relocating to a less valuable one. Freeing up an extra £100,000 of capital for your investments should make your position significantly more comfortable financially.

If you haven't done it already you should get a state pension forecast to see what you can expect from that. Then you can plan to deliberately spend some of your non-pension capital to increase your income until the state pensions start, knowing that the reduced income from less capital will be made up by the state pension money.

You wrote "personal pension fund" so I've assumed that it is a fund in a personal pension, consisting only of investments that you manage yourself and have full control of. That's different from say a work final salary pension. If you say more about your pension pot or pots and their types that might garner some additional suggestions, if needed.

Somerset

tocsin wrote: »

Also, don't feel bad about claiming JSA - you're entitled to it if you are looking for work.

I don't think you can claim JSA if in receipt of the pension.

jamesd

Why do you think you can't claim contribution-based JSA if receiving a pension and looking for work?

It'll be impossible to qualify for income-based JSA after the 182 days of contribution-based ends.

Saramago

Thank James,

My pension is a Group Personal Pension Plan with Clerical Medical. Of course the contributions will now stop.

Have been in touch with IFA but am never sure how independent they are. Can they call themselves IFA if they don't charge for the advice but earn income from various commissions. He suggested I take out of the pension 25%and invest it with other moneis but I am not sure if that is the best thing to do as statistically I could live another 30 years.

Also I am to get £50K redundancy. First £30K is tax free. The rest is taxed at 40% apparently. Is the best thing to do to place other £20 K into the pension pot, get the extra from the tax and then draw out 25%?

Somerset

jamesd wrote: »

Why do you think you can't claim contribution-based JSA if receiving a pension and looking for work?

It's wrong - you can have millions in the bank ........... but you are screwed if you have a private pension.

http://www.adviceguide.org.uk/index/life/benefits/benefits_for_people_looking_for_work.htm#jobseekers_allowance

Contribution-based Jobseeker's Allowance is not affected by any savings you have. However, if you have part-time earnings or an occupational or personal pension, this may affect how much contribution-based JSA you get. For example, the amount of contribution-based JSA that you get is cut pound for pound for any occupational pension that is over £50 a week. If you earn too much, you will not get contribution-based Jobseeker's Allowance at all.

jamesd

Somerset, thanks, I didn't know about that. One more point for salary sacrifice where you can choose when to take income or for delaying buying an annuity. Unless there's another rule that forces you to start taking a pension when you'd rather be looking for work. Seems that Saramago might benefit from living on savings until the JSA term ends.

Saramago, to call themselves an IFA they are required to offer the option of paying a fee instead of taking commission. Typically it might be something like £100-120 per hour and for the amount of money you have involved that may be cheaper for you. The IFA should be willing to tell you the cost of both options so you can pick the one that is best for you. The group personal pension means that the earlier replies are fine as they are.

Commissions come in two parts typically: some at the start when the funds are purchased and a typical 0.5% each year, paid pro-rata each month and funded by the investment fund company charging an extra 0.5% annual charge in their fund fees. If you pay by fee the initial and ongoing annual charges should be eliminated, so the annual charge (AMC) for the funds should be that much lower. Since you'll be paying that for a few decades it tends to make fee-based the way to go for your sorts of investment value because of the long term cost reduction.

Personally I'd go with the option the IFA suggested: taking the 25% and leaving the rest of the money invested in what's commonly called income drawdown. You're too young to get really good annuity deals so you can expect to have more income overall from the investments approach. But more ups and downs in capital value that you will see as markets move up and down. You can mostly ignore that because it's expected but it can still be too unsettling for many.

It's not necessary to go all for one option. You could use some of the money to buy an annuity to cover your core needs, for example. But with investments you can do the same thing in effect by using some lower risk investments within the investment mixture.

Since annuity payouts increase as you get older it's also sometimes interesting to spend £10,000 every two years buying an annuity. That has the effect of gradually shifting your money to a low risk option but not doing it all while you're young and getting poor annuity rates.

So far the IFA seems to be making sensible suggestions. Can't say more without knowing what investments are suggested.

Saramago

Thank you so much for all advice.

I am due to get £50K redundancy in June. I am interested to know what the situation is if I negotiate with my employer to pay £20K of my redundancy pot into my pension pot to avoid paying tax on it? Will I also get any extra tax on that as with regular payments I've been making?