Need reassurance please

edsks

I would be grateful for any views on a decision I need to make about my forthcoming retirement. My wife and I retire in August and we will both have a final salary, index linked pension and a lumpsum. If we opt for the maximum pension (and minimum lumpsum) then we think we would be able to live off our pension alone (and so whatever happens to the performance of our savings and investments we will be OK). Our financial advisor (an appointed representative) thinks that we should take the largest lumpsum and he believes that we should be able to achieve a 5% tax free return from this - thus achieving more income for us than if we took the maximum pension option. However this would mean that we would need to rely on both our pension and income from our lump sum investments in order to have an income that we can live off. So do I play safer and take the maximum pension (we know that we will likely pay more tax with this option, although we will be basic tax payers, we have paid off our mortgage and have no debts so do not need a lumpsum for any necesssary expenditure but whatever happens to the ecomony the pension is safe) or take the option which on paper seems more financially advantageous but requires us to achieve an income from investments (as well as the pension) to live? I thank you in advance for any feedback.

JA1000

Advice will always be to take the lump sum because of the tax benefits. Are you saying you need a higher income than the reduced pension in order just to live on a joint income?

His 5% return tax free from the lump sum is likely to be from regular withdrawals in an investment bond of some sort, don't quote me on this but look into it.

If the investment doesn't grow by 5% then you will be eroding your lump sum amount by a net effect. The amount it will grow will be up to your investment stategy, I am guessing you are risk adverse and will need to invest in 'cash' funds. With interestes rates as low as they are this will not be good but there is only one way, up.

It will be your choice but after all the tax you have paid do you really want to pay more than you have to?

dunstonh

Advice will always be to take the lump sum because of the tax benefits.

That old rule of thumb changed after pension "A" day. Now it requires a closer analysis of financial needs, taxation and the pension terms along with what would be done with the pension lump sum.

Our financial advisor (an appointed representative) thinks that we should take the largest lumpsum and he believes that we should be able to achieve a 5% tax free return from this - thus achieving more income for us than if we took the maximum pension option.

Independent appointed rep or tied appointed rep? If the latter, then move on and find an independent. Appointed rep only means that they dont control their own compliance. All tied agents are appointed reps but most IFAs are nowadays as well as they pay to use networks and external compliance companies to handle that sort of thing. The important bit is whether they are independent or tied.

5% is a reasonable level of income to use for long term average. On the investment bonds, it is not tax free. It is tax paid (i.e. tax taken within the investments leaving you no further liability unless you become a higher rate taxpayer or you exceed your age allowance reduction amount in the year you create a chargeable gain).

However this would mean that we would need to rely on both our pension and income from our lump sum investments in order to have an income that we can live off. So do I play safer and take the maximum pension (we know that we will likely pay more tax with this option

How much more tax?
What about on death?

The advice should have prioritised S&S ISAs above bond. And possibly unit trusts for the remainder (especially if the adviser is servicing and you bed&ISA each year). Bond tends to kick in as the tax and cost efficient option at around £100k+ investment. You would expect an IFA to do a cost comparison between bond and UT. A tied agent is less likely to.

MS_Dolphin

Hi,

Firstly, I'm not an adviser and not authorised to give advice, so I'm just offering my opinion.

It sounds like you have a very cautious attitude to risk. In that case, you need more specifics from the adviser - tied or otherwise:

What amount of pension are you giving up by taking the tax free cash?

When you know this, ask your adviser where specifically he is investing this for a better net return. Ask him how much risk is in this investment - if it is risk free, then you can have some assurances and retain the cash. If it is not risk free, then you have to make the decision as to whether or not the level of risk is acceptable to 'you personally'.

The other thing you have to consider is the impact your income and savings has on wider benefits - pensions/saaving credit, council tax benefits etc. There are some very good advisers out there but equally many who don't understand these areas. If you are unsure go and spend some time with CAB or other support agencies that can help you.

All the best with it and enjoy your retirement!!