400k pot to make a joint pension, but how to do it?

Taoism

Hi
My wife and I are 60 and 63, due to disability and long term low incomes have no pension savings. We are lucky enough to have inherited 400k, which obviously is fantastic for us. How do we manage it? We can probably last another couple of years before state pension without starting to use it up. We assume we have to use all of it to get a decent income. My thoughts so far with a little research is to simply put most of it in vanguard life strategy 40 with one investment platform eg iweb, and then drawdown an income of 4%. Any other ideas would be appreciated. Financial adviser, not sure, seem a bit expensive. We will be both eligible for the new state pension when we get there.
Thanks for any advice anyone can offer.

Linton

Is £16K/year enough for your needs? Suggest at least you split it evenly between you to get £8K each to minimise tax.

Do you strongly wish to leave the money as an inheritance or will your need for it die with you? If you have no or little need for the money after death spending it on an annuity could be worth looking at. It could give you a fixed income of roughly £24K guaranteed until death, more if your disabilities are life shortening.

For £400K and its importance for your happiness in old age I strongly suggest you do talk to an IFA. A few £K will be minor compared with the extra options that would be made available to you appropriate for your specific needs and the more efficient use of your money.

Taoism

Thanks Linton,
I suppose that when I looked at annuity rates and Adviser fees I was a bit shocked. 24k plus state pensions seems more than enough at the moment but in 10 years time I'm not sure. Buying annuity at some point may be best though. If we buy one now ish though we close down options. We'd like to pass money to our daughter but not sure we can afford to.

dunstonh

I suppose that when I looked at annuity rates and Adviser fees I was a bit shocked.

Annuity rates are one option but not the only one. Purchased life annuities dont have great rates nowadays. Generically they fit a need but commercially, they tend not to unless you are after a guaranteed income above all else. Lifetime annuities would require you to use a pension tax wrapper. Short term annuities could apply for some of the money but it is hard to tell on limited info.

With £400k, which tax wrappers do you intend to use and over what period?

kidmugsy

I second Linton's suggestions that (i) you split the money to use your personal allowances, and (ii) you pay for IFA advice.

I suggest you subscribe to ISAs to the max: £11880 now each, plus another £3120 in July. The point is to build up savings that will pay income tax-free even when your State Retirement Pensions might make you taxpayers. You might aim to both contribute to pensions this tax year: even if you have no earnings you are still allowed to contribute £2880 each per annum, which will be made up to £3600 by the taxman.

I also like diversification against even unusual eventualities; so, however good iWeb are, I'd make sure that at least half the money was with some other provider. I might even go so far as to ensure that less than £85k cash each was with any one provider (or, strictly, any one banking licence), and less than £50k each with any one stocks-and-shares provider/broker/platform unless I had good reason to suppose that the platform had unusually good financial backing. (One commenter at The Motley Fool asserted that he liked Alliance Trust Savings because the owner of that business, Alliance Trust, is an Investment Trust with very large assets of its own. I don't know how sound that argument is.)

Vanguard Life Strategy 40 sounds a good idea to me, but I'd not put all of my money into one pot. Could you diversify to other cheap competitors too?

One last point: have you checked that you are each due full basic SRP under the new rules, reaching 35 years of National Insurance Contributions? If not, can you buy the missing years now? That might be an excellent investment.

mike88

You mention that you and your wife have disabilities. Will these health issues affect the amount of money you will need? Have you considered for how long you might need an income of £24k if you took out an annuity bearing in mind that as you get older your need for income diminishes assuming that you are both able to remain in your home.

Given your age I would stick it in various banks plus a few equity income and bond funds and pure bond funds using your ISA allowances each year and take the money out as you need it. At all costs I would want to keep control of it so that would rule out an annuity for me. Assuming a period of 30 years then dipping into your £400k would give you and you wife an average of over £13k before interest and growth are taken into account.

I recall my parents had pensions through annuities but found that after the age of 80 they spent virtually nothing as they led a relatively inactive life as they grew older so accumulated money hand over fist. In the end that income was swallowed up by residential home fees while other residents of the home were supported by the State. My belief is that as you grow older your need for income diminishes as long as you have sufficient to pay the bills. The less money you have at the end of your life the more help you will be entitled to from the State.

kidmugsy

mike88 wrote: »

The less money you have at the end of your life the more help you will be entitled to from the State.

Or to put it another way, the easier it will be to freeload on your fellow taxpayers.

Taoism

Thanks for this.
Yes we have both full Ni contributions. I also worry about all eggs in one basket re both platforms and banks and max 50k is probably what I'll do but if you compare Hargreaves landsdown with iweb the fee diffs are huge for just having one fund.
Tax wrappers I am starting to understand. Seems like we have approx 36k pa we can wrap after July.
Are there any other vanguard lifestrategy type funds which would diversify the fund aspect of things or need I work out other index tracking options? I can't find any 'fund of funds' which get decent reviews.

dunstonh

I can't find any 'fund of funds' which get decent reviews.

Personally, I wouldnt use FoFs on £400k. It wouldnt matter if they are fettered or unfettered or managed/passive. However, there are plenty of decent FoFs out there. There are also a number of decent multi-asset funds as well if that is really the way you want to invest.

Taoism

Thanks
Why not use fofs on 400k?

dunstonh

Taoism wrote: »

Thanks
Why not use fofs on 400k?

Cost is typically higher on FoFs than holding the single sector funds that make up the FoF. On a small holding, it is cost effective for FoFs to be used as running a bespoke portfolio on a small amount is time consuming and expensive but on a large holding, cost gets diluted.

Also, you may prefer a different asset allocation to the one used by the FoF. For example, many FoFs, dont include all asset classes or are focused in a smaller range of areas (such as UK equity income). Again, not as big an issue on small amounts but £400k is not a small amount.