Advice please! AVC Annuity versus cash?

winnanan

Ok so we've opted for the annuty using the AVC's and today maxed out our ISAs for this year and put enough by in a savings account to cover next year's cash ISAs. That still leaves nearly 30k, which we will need to draw 8-10k off in a years time to supplement the pension. Any ideas about good investments?

Linton

winnanan wrote: »

Ok so we've opted for the annuty using the AVC's and today maxed out our ISAs for this year and put enough by in a savings account to cover next year's cash ISAs. That still leaves nearly 30k, which we will need to draw 8-10k off in a years time to supplement the pension. Any ideas about good investments?

The 8-10K you need in a year's time should be in a savings account or possibly in a 1 year fixed rate deposit. Any true investment would be very risky for under say 5 years duration.

What is happening about the remaining £20K? When will you need it. You could invest it to get a steady 5-6% return with some risk.

jamesd

winnanan wrote: »

The AVC will give £4.94 per £1000 (or £4.65 for both of us) if converted to pension (£648 or £610 additional pension per year, index linked)

That doesn't look like a good deal. Using investments you can get 5-6% tax free with 100% inheritance by a surviving spouse after first death.

winnanan wrote: »

Should he go for the annuity or is it better to hang on to the AVC pot and plough as much as we can into ISA's? (we have not used any of this year's allowance as the AVC's were a better return)

The AVCs offer both higher income and the ability to reduce the capital to top up your income until the state pension starts. That makes AVCs invested in a S&S ISA a better choice.

For temporary use you might consider Invesco Perpetual Monthly Income Plus which is currently paying out about 7% (6.92%), split into uneven monthly payments. That's a bit high to be sustainable and keep ahead of inflation but it'll help to meet your income needs until the state pensions start.

winnanan wrote: »

There's also the option to reduce his pension to £4600 pa and take a lump sum of £30,800 (incl AVC pot) instead.

This is a commutation rate of about 11:1. That's a horribly low commutation rate and this looks like a very bad deal. Basis is £7,665 increase in lump sum at the cost of £700 a year in lower income.

Now you've taken the annuity option with the AVC I'll continue using that assumption.

Using those suggestions you'd have this capital and income:

£23,000 redundancy
£10,000 lump sum
£20,000 endowment
£12,000 existing ISAs
£65,000 TOTAL

Using 7% for income temporarily you could get £4,550 of annual income from this. Add the annual pension of £5,300 and £610 from the AVC annuity and that's £10,460 income. It'll all be tax free because of income levels and use of ISAs.

With £5k to come from your pension in five years plus a lump sum it's safe to take some capital out of the £65k each year to top up your income.

I suggest that you take the investment income plus take out capital each year to increase your income to a total of £15,000.

That'll all be tax free. With an annual income from investments of £4,550 that's about all you should have in a savings account. The investment income can be set up to go into the savings account while you can take the regular monthly income from it by standing order.

If you use savings accounts instead of investments for more than a little of the money you'll need to use a lower income target, perhaps £13,000 might be safe then.

I've mentioned Invesco Perpetual Monthly Income Plus (2) as one possible investment. Another to consider is Newton Higher Income (3), currently paying 6.82%. You might use a little - no more than a tenth - in Marlborough High Yield Fixed Interest (1), currently paying at 10.5%. The 1,2,3 in brackets are priority for putting in S&S ISA - the ones paying interest come first, those paying dividends later.

The capital value of these will vary and they are deliberately types where the value will vary more than some to allow you to hit your income target, accepting the year on year variation of capital value of up to 20%. The money in the savings account would smooth this.

It's OK to hold these in a fund account outside an ISA until you can put them in an ISA, that's better than using savings, except for the money that'll go in the ISA after 5 April this year.

Once your own pension starts it would be good to adjust the investments to some that pay out less to switch a bit into more sustainable long term levels of income. You'll still need some income boost to get your income closer to what you'll have when the state pensions start but when you retire is the time to be considering how much top-up you can safely take.

Depending on the value of your own lump sum it might be possible to take a slightly higher income level now but since this plan fully meets the upper end of your £12-15k income target there's no need to consider that.

Please note that the funds I've mentioned are examples and while I'd be personally happy to use them, there aren't any guarantees with investments other than that the capital value will go up and down regularly just due to their nature.