Lump Sum from Police Final Salary Scheme - "Mad not to take it"

kidmugsy

puk999 wrote: »

Very good point which I hope you won't mind me re-quoting in case it got missed.

I don't think it's a good point at all. She can construct a potential inheritance just by buying some life insurance, or by building up a personal pension, both bringing a huge advantage in terms of avoiding IHT.

green_man

Furthermore, I very much doubt that the official financial advice was that taking the lump sum was a 'no-brainer'.

Yes clearly the 'no-brainer'/ 'must be mad' remarks are not direct quotes of the Financial advisors ( I assume they would be much more professional than that), but it was the interpretation taken away by the two colleagues that had gone through this process. Obviously their circumstances are slightly different to ours. My wife has an appointment in September with the advisors (to which I can attend) so we will discuss with them then, but I am very interested in general opinions on the best approach to make sure I am not pushing her in a direction that we would be best avoiding.

kangoora

One thing to bear in mind, if your wife takes no commutation and maximum pension - financial advisers are going to get nothing out of their, presumably, 'free' advice meeting.

If your wife takes the maximum lump sum then also, presumably, there is a good chance that you might need an adviser who will charge for pension assessment, recommend investments and offer an ongoing charge to maintain any portfolio.

So, the only way an adviser gets any ongoing payments is if they have something to manage.

Something to bear in mind when they make their recommendations.

I would be extremely sceptical of any advisor that shows you growth figures for investments based on the last 5-6 years as the world stock markets have been in a sustained bull run for that period of time. There are a considerable amount of people who believe we are overdue a major correction (crash) but who knows, there's also a lot of people saying the bull market can keep on climbing

princeofpounds

I am willing to bet your colleagues have heard what they want to hear, rather than what was actually said. Mind you, there could be a feature of the pension we are not aware of. Do update if you get any info on *why* they believe it is a no-brainer.

hyubh

princeofpounds wrote: »

I am willing to bet your colleagues have heard what they want to hear, rather than what was actually said. Mind you, there could be a feature of the pension we are not aware of. Do update if you get any info on *why* they believe it is a no-brainer.

Not exactly answering the question, but if someone's minded to commute anyway, the commutation rate in the 1987 scheme is way better than the 2015 scheme one (12/1, i.e. the 'usual' public sector scheme rate)...

atush

IF you out te 100K into good old investment trusts who invest for income (and have for deaces) and put them in an ISA, and they pay approx 4% tax free- you are there with your 5K PA less tax. Wont alwaus grow- might sometimes. Will pay out your 4% after tax needed, and leave sonething for someone to inherit f your point.

If not your point, darw 5%? After all would last 20 years w/o income so with ain comeo fo 5% should last liong enough.

Otherwise, as has been said this is a god rate.

My problem with taking it (and I would have no prob myself) is that the OP has said the income is not enough with the higher LS. and they have sticky fingers.

These to me mean a no brainer to NOT take the LS?

jamesd

green_man wrote: »

I've got to admit I know little about VCTs. I will have to investigate these, I know there are certain tax benefits, but the returns quoted above look remarkable, are these levels of return risking the capital figure? (seem too good to be true if not!)

All investments put capital at risk, it's the key difference between savings and investments. However:

1. The initial 30% tax relief less initial costs means that at least a further 20% drop is needed before money would be lost.
2. When I name specific VCTs I've tended to name those that are secured on property of some sort and that provides a debt collection method if something does go wrong. The 10.02% and 11.12% ones are Albion VCT and Crown Place.
3. I also tend to stick to mentioning well-established VCTs.

There's a wide range of risk available in VCTs, just as in other investments. You'll usually see me only mentioning the generalist and medium or lower risk ones where I think that the chance of losing money is low.

For more about the specific VCTs, follow the link in my earlier post to some discussion of them and follow the links from those posts as well. There are a couple of independent reports on the site for the couple of VCTs I've mentioned here, those are worth a read.

Use some caution when you read descriptions of VCTs being high risk. That's true in the same way as it's true that men are taller than women: yes, but not necessarily so when you look at specific individuals.

Do diversify. Don't just pick a couple of VCTs. use them, PP and lots of more commonly used investments as well. It's diversification that protects you if something really bad happens and a key part of investing is recognising that and ensuring that diversification is thorough, so even a complete loss of something can't hurt much.

jamesd

kidmugsy wrote: »

But with those "safeguards" added you are no longer comparing it with a steady after-tax 4% p.a. real per annum: you would be accepting an erratic income. Fair enough if that's what you want; but if it isn't, then the comparison becomes invalid.

If certainty is wanted then the whole Police pension should be kept. Once the decision not to do that is made then the drawing can start at a higher rate, knowing that eventually the rules might lead to lower income than the pension, bit only if sustained bad things happen. If starting at say 6% or even 5% it takes quite a lot of rule to get those down to 4% where the income level would still match the pension. There's never certainty in investing but the chance of receiving more income overall looks good. Yet it's still a chance, not certainty, and 90%+ isn't going to be good enough for some people.

kidmugsy wrote: »

You are also assuming that the spendthrift wife could discipline herself to apply the safeguards... In the end the enquiry boils down to "neither my wife nor I would trust her with £100k; might we be wise to swap that for a net income of £4k p.a., guaranteed and index-linked?"

I'm far from assuming that, I think it's the biggest risk to the taking of the lump sum and investing in this case. But it appears that he would be doing the investing and that significantly improves things. Still, it probably remains the biggest risk for her, not only when married but if divorced at some future date, or if he's hit by a bus.

jamesd

green_man wrote: »

Yes clearly the 'no-brainer'/ 'must be mad' remarks are not direct quotes of the Financial advisors ( I assume they would be much more professional than that), but it was the interpretation taken away by the two colleagues that had gone through this process.

It's definitely not a no-brainer but ignoring the risk of her spending the money it's very likely that a higher income can be obtained. But 90% chance is not certainty and it could eventually end up being less.

green_man wrote: »

My wife has an appointment in September with the advisors (to which I can attend) so we will discuss with them then, but I am very interested in general opinions on the best approach to make sure I am not pushing her in a direction that we would be best avoiding.

kangoora mentioned the last five years. We've been in a bull market since early 2009 so it's pretty much useless to look at just the last five years to see what could happen. Better to use the 120 or so year long term history of the UK stock market that's 5% plus inflation. That varies depending on just when the money is initially invested but we're at a medium value time at the moment so it's reasonable enough for where we are today in the UK and much of the world, though not so in the US.

I'm one of those who thinks that we're overdue for a correction. It's part of why I like VCT and P2P at the moment, they aren't connected to stock markets, at least not the asset-backed types I favour.

Expect advisers to be very negative to sceptical about relatively new investments like P2P. They probably won't know much about them and that will cause them to be extremely cautious, they also might not be authorised to advise on them at all, which would compel them not to suggest using them. They may not even know about the broad range of asset-backed or protected P2P and might think of only the far higher risk crowdsourcing type, or the low investment return ones like Zopa. VCT should result in less scepticism but they might judge on the overall average high risk of VCTs rather than looking at the specifics, so be sure they give opinions on specific VCTs, not just on the whole class called VCT. Do your homework and ensure that they are giving opinions on specific cases, not generalities or things they just aren't very familiar with.

jamesd

atush wrote: »

My problem with taking it (and I would have no prob myself) is that the OP has said the income is not enough with the higher LS. and they have sticky fingers.

"Sticky fingers" is perhaps not the best phrase to use in relation to a police officer, given that the normal usage refers to criminal activity. Not sure your non-UK background means you'd know that, though.

But you're right about the risk.