where to place my £50000 lump sum

charlie11

I am thinking about retiring early. I am 58 and will get a £68000 lump sum and £900 a month pension. I am thinking about dividing the £68000 by 8. which is the years Iwill have to go till I get my state pension. This will be to top up my £900 pension. I will take 16000 from the 68000 for to cover the first 2 years and was thinking about putting the rest, 52000 in to a base rate tracker and draw the monthly income off that as well, to add to my monthly pension as well. I am not sure if this is the right way to go, any input would be gratefully appreciated. I do not want to tie up the 52000 for a long period and would like a monthly income off it. Also what tax would I pay on my £900 a month pension?Sorry it is so long winded as I am not the greatest on pensions and need to get this right.

jimblinginginggh

I'm no tax expert so you're best going to an accountant or financial advisor with this question in all honesty.

The government, as with anything else, will stick their hands into your pockets as far as they can and yes, they see your pension (both private and state) as taxable incomes, and will calculate the tax rate based on both combined, so you may end up paying higher levels of tax. Make you feel sick, doesn't it!

However, if it was me, I would transfer the pension, in its entirity, to a tax free account abroad. I would then classify myself a tax exile and go to warmer climates to live the rest of my days in peace.

So to repeat, I would go to a tax specialist or a chartered accountant and ask them for their impartial advice on how to get the most bang for your buck...you've earned it, after all!

webmasterpolo

Hi

£900pm gross at 58 the with the normal tax code you would receive £823pm net.

When you say divide by 8, do you want to spend it all by the time your state pension kicks in? If so your income will drop as the state pension won't be £8,500pa (68k/8). You may want to make it last longer if you can.

A base rate tracker would pay 0.5%, a fixed rate bond would pay 3.5%+ so I would ignore base rate trackers. Check out the savings page if you're thinking of keeping it in cash.

If I were you I'd talk to an IFA and invest for the longer term, once it's gone it's gone and spending it all in 8 years might not be the best option.

-Web

dasherman

Your pension will be taxed in the same way as your salary, so the £8,105 personal allowance will apply.
My maths says you will pay around £45 per month in tax assuming your pension is your only income.

jamesd

£68,000 can produce around £4080 a year (6%) income if invested in mixture of income funds. That's half of the £8500 you're thinking of taking by dividing it into eight pieces. The investments will add some capital value variation,both up and down, but will reduce the capital loss rate overall since you won't be planning to spend it all. That should leave you some money at the end to top up the state pension income. It may also let you choose to defer the state pensions, which adds 10.4% for each year you defer.

The sort of thing you'd do is put the desired top-up income amount into a savings account, say £10,000 worth for a year. Set up a monthly standing order from there into your current account for spending money. Set up the investments to pay their income into the savings account. Then the saving account acts as a buffer against variable investment payout intervals and means you don't have to insist on just monthly income but can be more flexible.

Using this sort of approach you could probably add £10,000 a year but £9,000 should leave you more at the end to top up the state pension income or allow you to defer it to boost the income long term.

charlie11

Thanks, for all the advice

jamesd you are saying income funds CAN produce £4080, Could I just ask where you get that figure from, and can my £68000 go down with this investment? also, Which income funds? I do have some other investments in stocks and shares worth about £30000 plus £15000 in a pru bond, to fall back on.

jamesd

£4080 is just 6%, assuming some mixture of funds that is selected to have that yield.

The sort of funds that might be used and their yields include:

10.26% Marlborough High Yield Fixed Interest (pays quarterly)*
7.94% Newton Global High Yield Bond (pays monthly)*
7.10% Artemis High Income (pays quarterly)*
6.73%% Invesco Perpetual Monthly Income Plus (pays monthly)*
6.11% Invesco Perpetual Distribution (pays monthly)*
5.64% Newton Higher Income (pays quarterly)
3.79% Invesco Perpetual High Income (biannual)

Those yields are not guaranteed. The capital value varies, by as much as 40% in some of them. You'd use many different funds, not just one. Don't jut pick one high yield fund! Do look at the charts to see how the capital value can vary. The ones with a * should be first priority to go into a stocks and shares ISA because they pay out as interest and that won't be taxed if they are doing it inside an ISA.

What the higher income does is trade variability in capital value to reduce the certain decrease in capital value that you had in your original plan. So yes the capital value will certainly go up and down routinely, but that's better than a guarantee of going down to nothing.

If you were to use income-producing stocks and shares with the £30,000 that would also help with meeting your desired income target without necessarily reducing the capital value to nil. And that can help to keep your income up even after the state pensions start.

EdGasket

I don't think you can realistically get 6% without risk to capital in a market where the return on cash is currently less than 3%.
Those funds that Jamesd lists also take hefty management charges e.g. 1.58% per annum (total expense ratio) for the Marlborough one. Therefore if it is returning 6% to you, the fund has to be making at least 7.58% return itself. This is just not possible without a significant risk to a fall in your capital. If that were not the case, everyone would be invested in those funds wouldn't they?

jamesd

It's certain that the capital values will go up and down. The income will also vary, though by much less, perhaps a maximum of 10% or so down or up. The job of the savings account portion is partly to smooth that out.

8% isn't particularly high. It's the sort of rate that a popular high street company would have to pay on its corporate bonds. Not the highest possible credit grades but not atrocious either.

The alternative was certain capital loss in the original plan, losing 12.5% of the original amount a year every year.

Not everyone would use funds like those. Here are two of the reasons:

1. Most people don't even know that they exist.
2. Of those who know that they exist, most will be accumulating pots not requiring income, so would choose investments for that different objective.

I happen to hold two of those funds even though my objective in general is long term growth, though for one I hold the accumulation version rather than income one.

gadgetmind

jamesd wrote: »

If you were to use income-producing stocks and shares

Note that not all income is equal when it comes to tax. Any when the type of payment is income/interest will be subject to tax, but where income is as dividends then there is no more tax for a basic rate tax payer.

Some funds pay as income and some as dividends, so take care. Pretty much all income from equities (both individual companies and Investment Trusts) is as dividends. Income from Real-Estate Investment Trusts is a mix of both.

My plan for my pension lump sum is to buy shares in companies with decent and well-covered dividend income, a few Investment Trusts, and some other bits and bats. We'll then sell off enough each year to use CGT allowances and to fund our S&S ISAs. By the time state pensions kick in, it should nearly all be in ISAs.

You can draw about 5% pa without significant risk of depleting capital over 30 years, so over shorter periods can draw down even harder. You need a sensible mix of assets.

EdGasket

NOTE: If inflation rises (I think it has to because of all the money printing going on), then any form of fixed-interest rate investment will fall in value and continue falling for as long as inflation is rising. I would not recommend committing your entire pot to Bond funds. I think the OP's suggestion in the first post is a much safer bet.