Lump sum or pension question (again)

Bellabee

Sorry, I know this is a recurring question, but I'm having a problem getting my head round it. My husband is due to take voluntary redundancy, aged 61 and in good health. He has been offered the following options - Annual Pension £23,844 or reduced pension of £20, 912 plus tax free lump sum of £53,398. As I understand it, his pension is subject to RPI increases up to max 5% and max 3% for service prior to 6th April 1997. His service commenced in 1980 so this is a fair chunk of his total service.

We have savings of around £150,000 and would hope to downsize our house to release further equity. (How long it would take to sell though is anyone's guess!)

In addition to this, I (aged 58) have a Civil Service Pension of £18,000, and we own a BTL property which provides an annual rental income of around £5000pa, taking into account voids etc.

With any extra cash, we would intend to buy further BTL property in order to provide ongoing income. We are not investment savvy and would feel very uncomfortable investing in stocks and shares etc.

So, here's the question. Would we be better going for the lump sum or for the higher pension? The greatest unknown in this is the length of time it will take to sell the house. It is far too big for us and costs a fortune to run.

Many thanks for any views on this.

dunstonh

With any extra cash, we would intend to buy further BTL property in order to provide ongoing income. We are not investment savvy and would feel very uncomfortable investing in stocks and shares etc.

Yet don't feel the same way with property despite the two things actually being very similar in the mechanics of how they work. property is an asset with a variable value that produces an income yield. Shares are an asset with a variable value that produces an income yield.

So, here's the question. Would we be better going for the lump sum or for the higher pension?

You will know from the other threads that there is no definitive one-size-fits-all answer. In isolation the income is often better but when you factor in other things, some of which may be unknown things like date of death, it can swing things around.

In your case, your husband would see his age allowance hit if he took full income (which basically means he is taxed higher on the amount the amount of extra income we would take). However, if you plan to buy property and not use tax wrappers for investments, then he is going to be well through the age allowance reduction figure anyway unless its in your name. Also, the cash savings, if mostly unwrapped, would also take him through that figure.

The time to be asking this question is during your working life. For example, that £150k could be totally tax free with a bit of forward planning.

Your scenario is too specific to get a correct answer here. We need more information and even then I suspect both options could be suitable and it would be more a case of finding a balance between the pros and cons.

One thing missing in your thread is whether you need income or not and how much capital you need for future spending.

ermine

we would intend to buy further BTL property in order to provide ongoing income. We are not investment savvy and would feel very uncomfortable investing in stocks and shares etc.

Bloody hell, and yet you're investing in a single asset class with no geographical spread? What exactly is it about shares that makes you uncomfortable compared to that undiversified income stream from an illiquid and indivisible asset?

Okay, so whatever you do with your pensions they are big enough so that you're probably rich enough to not worry too much about the wolf at the door in retirement. However, compared to the stress of running a BTL, share investments are pretty easy going. You could buy low cost index funds (perhaps spread not just to the UK in case other countries make a better fist of their economies than us) and sit on your butt taking the income

Compared to tenants, mantenance, gas certificates and the like you get diverse sources of income and selling 1/10th of your shareholdings is a damn sight easier than getting somebody to buy the chimney and small bedroom of your house. But each to their own, good luck to you. If you can master evaluating the risk/return basis of BTL stock market index investing would be a breeze... Or are you going with BTL because it's the first way of making money from money that you know? If that's the case, you owe it to yourself to get your head round stock market investing if only to eliminate it for rational reasons rather than fear of the unknown.

jamesd

Two BTL properties seems to greatly lack diversification, more so if they are in the same area. That will make voids more unpleasant than they need to be. Do you really have no capability to raise capital with mortgages on the properties so you could increase this to perhaps five to ten properties and spread the risk further between properties and areas?

Given your husband's good health and the relatively small lump sum compared to the current cash savings and funds I assume would eventually be released by downsizing my inclination here is to suggest taking the higher pension and using that to produce a guaranteed secure income for life.

Bellabee

Thank you all so much for your helpful replies. Ermine, yes, you're perfectly correct in saying that we had homed in on BTL because of our ignorance about (and fear of) stock market investment. I think the three of you have now given us the impetus to go out and investigate the stock market. I very well see that our plans lack diversification. I think part of the problem lies in the fact that property is a tangible asset, and we're used to buying and selling houses. You can see where your money is, but stocks and shares seem so much more intangible. I realise that this is totally illogical and we need to get off our backsides and do some learning. Dunstoh, I also accept that property ownership and BTL bring risk. You are quite right to point this out.
Jamesd, thank you for your suggestion of taking the higher pension rather than the lump sum. That had been our initial intention, but we've recently begun to have doubts. We do intend to speak to an IFA before making our final decision, but all of your replies have provided us with much food for thought.

dunstonh

I think the three of you have now given us the impetus to go out and investigate the stock market.

Invest doesnt mean stockmarket. Its mean a collection of things which inlcude the stockmarket. Gilts/Bonds, equities, cash and property can all form part of a portfolio.

You dont have to jump from one end of the risk scale to that other. It is a sliding scale.

atush

I agree with all that has been said. Property is an investment like Equtiies are, and given you own your own home and a BTL already I feel you need diversification.

So I would diversify in one way in by taking max pension and not additional Lump sum. Given all your income streams of IL pensions, plus 150K cash, plus BTL invenstment.

ermine

With the amounts you're looking at you might want to look at getting an independent financial adviser, though it is also possible to get a handle on investing yourself. An IFA may be able to explain things to you quicker than you could pick up DIY, but you do need to understand the issues, since it's your money and your life so what you do has to line with your views, resources and dreams.

You've done a lot right, owning your own home is a no-brainer, and BTL is one kind of investment and there's nothing wrong in having some of that as part of the mix. The other main classes of investment IMO are shares, cash and bonds/fixed interest. Index-linked pensions can substitute for the latter. And of course you need operating capital in the form of cash to handle the unexpected, and fun.

For the principles behind share investment Monevator is good and reasonably accessible (passive investing is a good place to start), and the diversification issue people are going on about is explained here. The Motley Fool Getting Started in Investing is also good IMO.

Diversification applies across the financial sector and to taking risks generally. For instance, if you have two part time jobs each paying half a full time salary your income is more secure against redundancy as you're unlikely to be terminated from both. You want your income to be diversified in source, class of asset (shares, property, fixed int/pension), sector (type of business eg mining or pharma or retail or telecoms etc) and geographical spread.

Bellabee

Thank you all for taking the trouble to reply. You have given me so many useful pointers. I'm off to do a session of heavy reading now. The start of a steep learning curve!

property.advert

They understand BTL and they appear to know how to make it work. Why all the rush to push them into something they neither understand nor want and which they feel decidedly uncomfortable with. Owning 2 BTL properties is hardly worrying in terms of a lack of diversification in retirement when there is a £20k plus pension as back up. It is a simple straightforward investment which they are comfortable with.

I suppose they could go study nuclear physics and make a post retirement career advising on the decommissioning of nuclear power plants but I suspect they have neither the time nor inclination to do that either.

I think the more poignant issues are whether they wish to gear up and use borrowing to expand their BTL business or whether they want to be debt free and utilise part of their £150k cash pile and a potential £53k lump sum.

Of course they need to consider taxation as well as their need for easy access to cash and fundamentally their regular expenditure.

ermine

It is a simple straightforward investment which they are comfortable with.

Eggs. Basket. One.

Plus if you are going to ignore an asset class you should have a rational reason to ignore it. The OP was looking for what to do with their PCLS which was about £53k. The state of the property market in the UK is such that this could be noise in the volatility.

The answer might well be that 'we've looked at shares and other assets and considered the field of potions and BTL matches our skills, knowledge and predilections. So much better to take that decision from 'we've looked at the alternatives and this looks right for us' than 'there are those other possibilities over there but we haven't looked at them because they looked scary'.