Lump Sum Investment

jagnew1234

Hi, I am due to start flexible retirement in the spring, working two and a half days and drawing my 40 years public service pension to make up the rest. I'm 60. I would imagine mine is a pretty standard case. My total income will be about 25K which I will be able to live on quite comfortably. I have about 15K of savings in various ISAs, one year bonds and the odd shares. I will be receiving a lump sum from my pension of about 45K. Apart from the 10k to top up my ISAs any suggestions as to what to do with the rest. (possibly give the wife 10k for an ISA ???) I will probably only work about another year, or two at the most. The wife works part time and has a very small works pension and is now getting her state pension. Thats about it.
Thanks, Jim

JOHNGT

Jim,

Depends on how much risk you want to take.

You can each (you and your wife) put more into a stocks and shares ISA (£10200) compared to a cash ISA (£5100). Or you could put £5100 in cash ISA and £5100 in stocks and shares ISA. This could use up up to £20400 of the lump sum for 2011/12 (I'm assuming spring means after 5th April 2011).

You could also think about rolling more into ISAs next tax year 2012/13 so may invest in say a one-year bond to get the best interest rate until then. This would use another £20,400 of the lump sum.

If your wife isn't using her full personal allowance of £6475 (assuming she is under 65) then investing in her name means she could apply to get interest gross which is as good as investing in an ISA.

jamesd

Using your full ISA allowance and hers would be a good start. Just work on getting the money into the ISA tax wrapper as time and limits allow. With a 25k taxable income you'll need to look at the ISAs to avoid more age allowance reduction than you'll already suffer once you're entitled to it at 65.

If income is your objective you'd be looking at a mixture of high yield bond and other funds. The sort of funds that might be used and their yields include:

9.6% Marlborough High Yield Fixed Interest
7.9% Newton Global High Yield Bond
7.2% Newton Higher Income
6.6% Invesco Perpetual Monthly Income Plus (pays monthly)
6.2% Invesco Perpetual Distribution (pays monthly)
3.9% Invesco Perpetual Income

Those yields are historic and not guaranteed. The capital value varies, by as much as 40% in some of them. You'd use many different funds, not just one.

With £60k of capital you could take about 6%, £2,400 a year, long term and not expect much capital value reduction, or slight growth, depending on which investments you use and how they do.

You'd give bond funds first priority for the ISA because they can pay out bond interest tax free within one.

For your wife, let us know if she's not getting a full state pension. She has the opportunity to buy back years to increase it, even when she's already receiving it.

kidmugsy

You could consider your wife's tax position. By the time she's 65, she'll have a annual personal allowance for income tax of around £10k. If "a very small works pension and .. her state pension" is all the income she'll have, she may not be using all of that allowance. But you could contribute £2880 per annum to a personal pension for her, and then she could later draw a pension from that which would be, in whole or in part, tax-free. The rough arithmetic might be:

Contribute £2880 pa x 5 years (say) = £14400.
Sum in pension = £3600 x 5 = £18000
(That includes the tax rebate claimed by the pension provider, and ignores any growth in the fund.)

On "vesting" (also known as "crystallising") the pension, she could have a tax-free lump sum of 25% = £4500, plus she'd get her pension at whatever rates are then being paid, and also (we're presuming) tax-free.

If you didn't want the risk of equity investment in her pension fund, it would be a matter of choosing a less risky option - for example even "deposit".

You'll see that the net cost to you would be approximately £14400 less £4500 = £9900, but your wife's new pension income would be generated by a fund of £18000 x 75% = £13500, so that you've effectively conjured up £3600 out of nowhere, to get an untaxed (or lightly taxed) pension.

For these purposes, "nowhere" equals "all the rest of us taxpayers".

jagnew1234

She currently works 2 days in a high street store, about £120 a week but like me she intends to retire completely April 2012 when she will be 62. Works pension is £20 a week and state pension is £113 a week.

JOHNGT

kidmugsy makes a good shout regarding funding a pension for your wife and drawing it when her personal allowance goes up at 65. When she stops working, she will have roughly £7000 taxable income so she can have roughly another £3000 income untaxed.

Disadvantage of pension is that 75% of the fund must buy an income for life. ISA is more flexible as you can access it and spend it when you want.

As you say you have enough income and you don't have a huge amount of capital, so sticking with ISA may be best for flexibility regardless of the tax efficiency of pension.

A the moment and up until retirement, your wife uses most of her personal allowance (£6240) so she could earn another £235 in interest without paying tax on it. At an interest rate of 3% she could safely hold about £7500 in a deposit account which would have gross interest just like an ISA.

After she retires and until age 65, she will use all of her personal allowance, so she may have to switch any non-ISA deposit to an ISA at that point but she should have another year's allowance by then.

kidmugsy

In your shoes, I'd consider my earlier suggestion but I might well reject it. It's easier to turn capital into income than income into capital, so there's always a case for using ISAs and spurning the idea of buying extra pension.

jamesd

For the state pension of £113 per week she should check what amount of that is from the basic state pension, just to verify that she is getting the full basic state pension.