What to do with lump sum

enthusiasticsaver

My OH is retiring early this October and we have decided to take his company pension as the difference between taking it now and in a few years time is only around 2% per year and will be outweighed by having it for a few extra years. We have to take the pension commencement lump sum at the same time. It is all tax free. What should we do with it?

We don't have a mortgage anymore and although we will be doing some big holidays at some point in the next 5 years we won't be having a big spend out initially. It is around £135000. Presumably most people will say invest it but as he will be paying tax (his annual pension will be around £20k) we want to make the most tax efficient choices.

saver861

Well if you are doing the holiday thing in next 5 years then you need that money on the ready. 5 years is generally too little to invest properly without potentially taking a hit.

If you max out all of the high interest accounts, e.g. Santander, Lloyds, TSB and a few others you will average a return of around 3%+. Given the low inflation then thats a winner at the moment. You probably can store away around £80k to 90k in these accounts and they are instant access.

That leaves you with around £40k to play around with. Depends on your tax circumstances, he will be paying tax but are you. If not you can make £720 per year just putting money into a SIPP and taking it out again, if you are over 55.

There are a number of possibilities but I'd be inclined to sit down and work out what upcoming costs you have, emergency fund, the planned big holiday costs etc. From there you might be in a better position to make decisions on where you want to put your money.

bigadaj

Does the lump sum have to be taken or is there an option for extra pension, and if so how much?

Most tax efficient use would be putting back into pensions for the two of you as you can, and isas for stocks and shares funds investments.

The first £1000 of interest on savings are now tax free, plenty of current account options for higher returns, and there's also the dividend allowance on shares investments which would be £5k each, and so could avoid tax with some risk in investments for the who,e amount between the two of you.

xylophone

We have to take the pension commencement lump sum at the same time. It is all tax free. What should we do with it?

It depends on financial position as to who pays in family meals out with us. We are in a much healthier financial situation than either of our daughters so we almost always pay but then we invite them and my son in law and granddaughter out as we know money is tighter being they have mortgages to pay and childcare costs etc whereas our expenses are low now.

Had you thought of making PETs now? A gift to each daughter and to your grandchild's JISA?

atush

get major capital expenditures done now, such as replace car, home maintenance (or future proofing). PETs as said.

Then 2x S&Sisas, and cash to cover at least 2 years living.

enthusiasticsaver

Thanks for suggestions. We have already done PETs to our daughters to it houses and until we have decided on our big spends in retirement ie car, holidays, new kitchen we are reluctant to give more away at the moment given we could be looking at potentially 25 or more years of active retirement. I am 56 and my OH is 57. We have other savings too to cover emergency fund etc etc. I have a s and s isa but we may look into one for OH and possibly a SIPP for me.