VR Advice

Newark17

Hello everyone
Any advice on my situation would be appreciated

I’m 53 and have being offered Voluntary redundancy which would equate to a pension of £1000 per month (index linked) and a lump sum of £43,000 or £700 per month and £96,000 lump sum.
I have no mortgage or debts, standard rate taxpayer and over £100k in savings (currently in IceSave ) and have used up this years ISA allocation.

I have calculated that I can live comfortably on the pension and interest (16.5K after tax).
My current thinking is that if I spend all the pension and interest each year, I will still receive an increased pension each year, where-as the lump sum will remain the same and be eroded by inflation, after 20 years the difference could be quite significant.

Therefore the higher pension appears to be the best option - does this sound reasonable or should I be looking at it in a completely different way?

jem16

I am no expert on this but I shall give you some views to get started. I'm sure someone who knows more will be along soon.

Looking at your options it might be best to get your whole situation reviewed by an IFA who can get your money to work better for you than it already is.


You mention over £100k in savings which if I read it correctly you would plan to use all of the interest from to augment your pension. The big problem here is by doing that your £100k+ is soon going to diminish through inflation. This will then reduce the amount of income you will get from it. If it was invested you could still take 5% pa tax free ( as opposed to 4.8% net from icesave) and also achieve growth on it.

As for the pension options, the difference in lump sum is £53,000 for £300 less each month. Instead of having the lump sum in a savings account you would be looking to invest this to give growth and perhaps an extra income. If it's invested correctly you could easily achieve 5% pa income plus extra for growth.

£53,000 at 5% is £2650 and would be tax free.
The £3600 you are losing would be taxed so £2880.

Not a lot of difference. You still of course have the other £43,000 in lump sum.

As I say just some ideas to get you started.

EdInvestor

What is the position with your state pension?How much will you get and when? This will likely change your tax position quite drastically for the long term and mean it will be better to take the smaller company pension and the larger lump sum.

The latter would then ideally be sheltered year by year in your maxi ISA and invested cautiously to beat inflation over the next 30-40 years.

Being in the fortunate position of having guaranteed index linked pensions and a large cash fund (plus your own home presumably?) you are in an excellent position to take some a low risk approach with the other lump sum. This should also get you a more stable income than is available through cash deposits.

Newark17

Thanks for the replies -

Jem16 - I am definetly going to visit an IFA (I have downloaded the free inital consultation voucher from unbiased.co.uk

Edinvestor - yes I do own my own house, but with regard to my state pension I have only worked for 25 years so I dont expect a lot from that.

jem16

Newark17 wrote: »

Edinvestor - yes I do own my own house, but with regard to my state pension I have only worked for 25 years so I dont expect a lot from that.

The requirement for full state pension changes to 30 years around 2010(I think) so perhaps you might get more than you think.

Why not do a pension forecast at

http://www.thepensionservice.gov.uk/

EdInvestor

jem16 wrote: »

The requirement for full state pension changes to 30 years around 2010

That's correct so you will definitely be OK for the full basic pension. Get a forecast to see if you will get more on top from SERPS/S2P. Then come back to us with the figures.

jamesd

Newark17, 1000 higher monthly income option is equivalent to 6.8% return on investment on the difference in lump sum value. That's quite good. It can be beaten with investments but it may be good to keep the higher income as a base income and use your 100,000 pot for the variable part, so a big chunk of your potential income is secure.

What income each month do you need to live reasonably well, so we know a minimum threshold for the income you need?

What is your experience with investing? How much of a drop in the value of investments could you take without losing sleep for a year or two before it recovers over the next few years? 10% would significantly cut your possible investment return, 30% would open up a wide range.

The 100,000 in IceSave is a shockingly inefficient use of the money, even though IceSave is an excellent savings account. Your base plan should start out at putting 7,000 of it a year into investments in a stocks and shares ISA until all but perhaps one year's income is invested, though you can only use 4,000 this year if you've used the 3,000 cash ISA allowance. The rest could go to unit trusts and OEICs outside the ISA. Income-producing investments inside the ISA to exploit the lack of tax on income from an ISA, growth outside to exploit your capital gains tax allowance.

Your IFA must clearly explain the reason for any deviations from the outline I've suggested: it's good basic plan that won't be lucrative for a traditional IFA. It would work well for an IFA using the New Model Adviser payment basis - indeed, seeking out an IFA using NMA terms (minimal or no up-front commission, paid by commission from the fixed annual charges on the investments, so their income grows if they manage your investments well) is likely to be a good option for you. Not mentioning use of the stocks and shares ISA allowance is a red flag that should warn you to be cautious about the advice you're getting.

You should get the state pension forecast and find out if you can pay for any additional years to take you to 30. Any years up to that may be a good deal for you. There is some automatic crediting of contributions above age 60 and that could get you another few years if it continues, but the cost of extra years is quite low and may be worthwhile paying to get certainty.