How should I regard situation?

middlepuss

FLAPJACK wrote: »

Middlepuss,

Thanks for that quick comment...I was about to delve into the wonders of IHT...having coughed up nearly 30k for Mr Brown a few years back!

£30K - it hurts just thinking about it.

The IHT rules were pretty savage until George Osborne spooked Alistair Darling into significantly increasing the tax free IHT allowance a couple of years ago.

dunstonh

but I have been told twice by two that as you have an aversion to risk then you are doing about all you can in that Fixed Rate Bonds are about as safe as you can get.

You are replacing investment risk with inflation risk and shortfall risk. Risk is not on/off. Its a sliding scale. It is not just about volatility but about not being able to achieve your goals. Risk exists everywhere. No-one would suggest you go gung ho up the scale to that extreme. However, ignoring all options other than cash is going to one extreme.

As regards inflation...surely adding £650 a month is increasing the capital faster than inflation is eroding it....am I missing something?

It's still affected by inflation. At the moment, it indicates you dont have to take a lot of risk and that is good. It also means you have some scope to accept some risk without being financially hit by hit. Utilising the annual S&S ISA allowance in full wouldnt have much risk in the scheme of things. If you take the figure of £10,200 against £280k. then a drop of 10% on the £10,200 is equivalent to a loss of 0.3% on your "portfolio". It wouldnt even register. If you and your wife both paid into a personal pension then you gain 20% tax relief. Thats a 20% immediate gain. You have effectively given yourself a stockmarket crash free in the tax relief (corny I know but what the heck). You then get tax free growth on that money which is also outside of the estate. If you dont need it, you dont take the pension. Compound that over the years then it soon adds up. Plus, if you die before your wife post scheme retirement age, your wife has a pension of her own to utilise and yours (assuming you didnt commence it) is paid out in full tax free. If risk still concerns you then use investments with elements of capital protection.

FLAPJACK

Hi dunstonh,

I take on board what you say about another pension..just use it as a S&S vehicle...but haven't these type od pensions taken a hit lately....how longterm do you think I should be looking? You say if I don't need the pension compound it over the years.....I take it I could at somestage start taking it and a 25% lump sum?

I recently looked into Annuities too...bearing in mind the health situation...the results were poor because of my age £100k = 4k pa (4%) so I was advised maybe to look at htme again when I'm older and the Annuity market is in better shape.

Thanks for giving me options....

dunstonh

but haven't these type od pensions taken a hit lately..

Nope. Indeed, the recent rule change proposals are all positive as they remove the need to buy an annuity and allow you to remain invested post 75.

.how longterm do you think I should be looking?

Rest of life. After all, you are 53 and have little or no working life left (depending on health). You have your retirement years and you have to consider the impact of death on those (i.e. the 50% reduction in income to your wife). You have been focused on income provision but at 53 you will have a number of larger capital purchases to make. You have also expressed interest in some expensive activities that will likely be paid out of capital rather than income.

? You say if I don't need the pension compound it over the years.....I take it I could at somestage start taking it and a 25% lump sum?

You could do. However, the pension is more tax free than the ISA until you crystallise it (commence benefits). So generally, you shouldnt take the pension until such time you need it.

I recently looked into Annuities too...bearing in mind the health situation...the results were poor because of my age £100k = 4k pa (4%) so I was advised maybe to look at htme again when I'm older and the Annuity market is in better shape.

Which, could play into the situation nicely. Currently you would have to be looking at purchased life annuities. If you still wanted annuities later then if you used pensions each year until you built up £100k (ignoring growth) then it would have only cost you £80k due to tax relief. The lifetime annuity would access to enhanced terms and whilst the purchased life annuity is slightly more tax efficient on the income payment than the lifetime annuity, the annuity rates on lifetime annuities are often a little higher.

middlepuss

FLAPJACK, I can understand your not wanting to lose all that capital as a result of investing it on the stock market - you'd never forgive yourself.

However, if within your ISAs and/or pension funds you invest in a few big and boring funds (index trackers for example) you won't lose it all (unless the financial world collapses in which case your cash will have evapourated too!), though the capital will bob up and down.

You can each put £2,880 into a personal pension each year and that nice Mr Osborne will chip in £720 so you end up with £3,600 in your SIPP/stakeholder.

FLAPJACK

Hi middlepuss,
I have a S&S ISA which has increased by just over £3k in 3 years...I value it every month..sad I know!

I will have a look into Pensions as a saving vehicle...from what you say though it doesn't sound as though I could put a lump sum in ...even so if we both put in the max of £5776 per year for the foreseeable (and as dunstonh has said I have the time in hand because of my age) it could add up to a sizable sum plus 20% from the Tax man,.

I would have to consider the A/c as like a fixed rate one in that once you have the money in it you can't get it out until maturity....except I / we would have control of when to draw the pension. It's not a bad idea and I thank both you and dunstanh for flagging this up.

The next problem though is how do I pick a decent scheme???

middlepuss

And of course you can each put £10,200 into a S&S ISA every year.

I don't know which would be the best pension scheme for you. I'm just starting a SIPP with Hargreaves Lansdown - there may well be other providers that would be better for you, but the H-L website is worth a read as it gives quite a good intro to the subject. I also have a Stakeholder with Legal & General - again there may be better providers but their site is also fairly easy to understand.

FLAPJACK

Thanks again middlepuss,
I will start my homework SIPP's etc.

jamesd

FLAPJACK wrote: »

but haven't these type od pensions taken a hit lately

Depends what you mean.

If you mean using income drawdown to take income then yes, they took a substantial hit with the announcement that the permitted income will be reduced by about 17% for those who don't buy an annuity. Also there's a substantial tax increase, from 35% to 55%, on the pots of those who die before age 75 while using drawdown. It's still better than buying an annuity for many people, particularly those of your age who unfortunately do suffer most from the reduced income level. However, that reduced level is still over 5.5% so it's more than you could expect to take after inflation from term deposit accounts.

If you mean investment growth then in 2008 there was a drop while 2009 was one of the best years on record and 2010 has also been quite good. I did very well out of those last two years and didn't suffer much in 2008. That was in S&S ISA, pension and outside either, all doing well.

Whether the £280,000+ will last you depends on income, expenditure and inflation. Using term deposit accounts isn't going to provide adequate inflation protection so you should be looking to do some investing as well as using savings accounts.

Since neither of you is working that limits you to £3,600 gross each of pension contributions a year, making it hard for pension use to be a significant part of your planning. Your own income is high enough so that your full personal allowance is in use so that suggests that you won't receive a large tax benefit from using a pension. You would get some benefit from the 25% tax free lump sum but that's at the cost of tying up the other 75% your money. I don't think that's a good deal in your situation.

Your wife might be in a better position to benefit if the combination of her work and state pensions is less than £10,000. If it is then £3,600 a year into a pension for her might be a good idea, else it's probably not going to deliver enough benefit to be worth doing.

Dunstonh describes one possible reason to do it, though: if you wanted to buy a lifetime annuity and forget worrying about some of the money.

Using the full S&S ISA allowances each year seems like a good idea for both of you. Growth in investments here will be your main protection against inflation. Aversion to investment risk means taking the certainty of inflation reducing the value and that's not a good deal. Better to take some investment variability for some of the money to get the protection rather than taking the certainty of a decrease in value for all of it.

Given your aversion to risk I'd like to see you and your wife putting in the full allowance each year for three to five years, so £60,000 to £100,000 is invested and getting you that inflation protection. that way you still have by far the most money in the savings that gradually decrease in value but don't bounce up and down so much, so the total value variation is going to be quite small even during a bad year for the markets.

Say you put a total of £100,000 in and it was all in a FTSE tracker fund that dropped in value by 40%, about what happened during the drop in 2008. That's £60,000 there plus £180,000 so £240,000 total out of £280,000. A temporary drop of 14% that's a lot easier to deal with than if it all dropped by 40%.

As usual there I wrote about the bad years, because it's important to talk about them so people aren't surprised when they happen. But that's not the whole picture. Over five year periods from 1978 to 2003 the main UK market averaged a return of 10.5% plus inflation. That's way better than a savings account.

Say that instead of a 40% drop in the first year with all of the money invested there was a drop of 40% after five years of average growth. Ignoring inflation that's five years of 10.5% so if all of say £100,000 was put in at the start it would be worth £164,744. Now the 40% drop reduces the value to £98,846, only a little below where it started.

That's one of the key facts about investments: over time it becomes less and less likely that you'll end up below where you started because time gives a chance for the average results to overcome the annual ups and downs.

It's also possible to build in a guarantee that over say five years a combination of investments and savings accounts won't have a lower value than at the start. Here's one way of doing it:

Put 75% of £280,000 into term deposit accounts paying 5%. Put 25% into a FTSE All Share Index tracker paying 3.5% dividends (about right for this sort of tracker). If the FTSE tracker portion falls to no value at all at the end of the five years you'd have:

savings: £268,019
dividends: £12,250
tracker fund: 0
Total: £280,269

So that's avoided a loss, ignoring inflation. But that's assuming no value for the FTSE tracker part. Here are some other possible values:

50% drop: £315,369
100%, no change: £350,269
30% up: £371,269
50% up: £385,269

A 100% drop isn't very realistic, it implies every significant company in the country becoming worthless. More realistic is a bad case 50% drop. You can get protection from that by putting 55% into the term deposit accounts, then you have:

drop to 0: £218,597
drop to 50%: £281,597 - protection achieved
100%, no change: £344,597
20% up: £382,397
50% up: £407,597

Putting £100,000 into investments would be about 64% cash so in this sort of calculation you'd have £280,000 down to about a 65% drop in investment value.

Of course this is just using one investment, with quite a lot of variation. Property funds, corporate bond funds and other things are available that have lower possible drops and higher income levels, so they can provide the protection more easily.

For an IFA you're potentially a high risk customer. Those who say they want low risk and who don't understand how the ups and downs work are particularly likely to be upset when they encounter the downs part, then possibly make a mis-selling claim. Which is part of why I tried to explain how you can use a mixture to control the risk and how time helps to protect you.

I'm not an IFA, though, just someone looking at your situation and looking to get you some protection from inflation.

jem16

FLAPJACK wrote: »

I'm interested in the comment you make as regards "age allowance" etc...could you shed more light on that aspect..what sort of thing am I to look out for?

At the moment over 65s have a higher tax-free personal allowance of £9490. To receive this higher allowance you must not have taxable income over £22,900. If you have income over this you start to lose some of that higher allowance at the rate of £1 by every £2 above the limit. This can work out as effectively a 30% tax rate.