What to do?

April2

6 years away from state pensionable age and due to inherit £200k in the near future.

Simple savings accounts would earn, say, £12k gross/£9.6k nett which, on top of a state pension in 6 years, would be a reasonable retirement income.

For someone not willing to take risks, is any other option (e.g. putting all or part of the £200k as a lump sum into a pension) worth considering?

dunstonh

By using savings accounts you are taking risks. By drawing the interest the capital will always stay at £200k. So, each year it is going down in real terms due to inflation. 10 years down the road, it will have the spending power of around £140k. 10 years after that it will be around £98k.

Risk is not an on/off position. Its a sliding scale and there is no nil risk option. Its all about finding a sensible level of risk. That doesnt mean you now have to go all gung ho and dive right in at the deep end. A small degree of risk on some of the capital could keep you up with inflation over the long term.

putting all or part of the £200k as a lump sum into a pension

Which means investing the money and taking risks. You could use cash options on some pension schemes but it sort of negates the point of using a pension.

Your best bet at this stage it to get a better understanding of risk and reward. Knowledge is key here as perhaps some of your unwillingness not to take risks is due to lack of knowledge and possibly some incorrect assumptions.

April2

dunstonh wrote: »

Knowledge is key here as perhaps some of your unwillingness not to take risks is due to lack of knowledge and possibly some incorrect assumptions.

Never having had a sniff of this sort of money before means instinct kicks in where knowledge is lacking. All I know is I don't want to risk handing over the capital to one of the wide boys in the 'industry' (like so many have in recent years)!

jamesd

Using the full stocks and shares ISA allowance each year until you retire and making pension contributions up to your whole annual salary are both probably good ideas, particularly if you're a higher rate tax payer now but won't be in retirement.

How close are you to 20,000 taxable income in retirement at the moment, from other pensions and interest? That might make use of an investment bond as a tax wrapper interesting, perhaps for 100,000 of it. More interesting still if you're a higher rate tax payer now.

Have a read of Ok then - How do I choose a S&S ISA and the discussions linked from it to get an idea of what a sector allocation is and how you can do that in a S&S ISA. Same principles apply within a pension.

You can hold the money in investments outside the pension or ISA wrapper until it's time to invest them inside a tax wrapper.

Interest on 200,000 in a savings account counts towards making you a higher rate tax payer and additional tax might be due if it takes you over the threshold.

Dunstonh is right about inflation.

For advice, you could usefully seek out an IFA who does a lot of investment work. Make sure that all of the words "independent financial adviser" are present, not just the last two. The services you're after should include:

• Initial sector allocation using Watson Wyatt or comparable method.
• Investment selection advice within the sectors.
• Annual rebalancing.
• Advice on fund changes if a fund manager changes.

The cost should be no more than two percent and no ongoing charge because the IFA will get 0.5% out of commission from the annual charges on the funds the money is invested in. I'm assuming an adviser using the "New model Adviser" charging basis. With the sum involved in your case, you could expect to get a better deal than the one I've described - maybe nothing up front and a rebate of some of the annual commission.

No problem to get a second set of opinions here about whatever advice you get.

EdInvestor

Your risk here is inflation.

To maintain the value of your capital you need either to

a)Reinvest a chunk of the interest equivalent to the inflation rate rather than spending it as income

and/or

b)Invest a portion of the money in risk assets which offer the opportunity of long term growth, and income as well.This need not be a lot of the money: I would start small with the annual 7k investment ISA allowance and look at property funds and equity income funds.

Tax reduction is another area you need to look at, as if you can minimise tax payable on income, then you can reinvest that money to maintain the value of the capital.(Have a look at tax free N and SI products for your cash and note that basic rate taxpayers in your income bracket don't pay tax on dividend income from shares.)There's no apparent advantage in using a pension wrapper.

April2

Sorry, forgot to say I have a 'nearly full' cash ISA (topped up with £3000 every April 10th - now nearly £30k - currently in YBS @ 6.05%) so there's no wriggle room there except a possible change of institution.

dunstonh

You havent been using the £4000 ISA allowance left over then? There goes some of the money for each of the tax years from now on.

jamesd

Ruffler Bank will pay 6.4% and accepts transfers in, gaining you 100 a year on 30,000.

As of next April it's expected that you'll be ale to transfer some of this to a stocks and shares ISA if you want to.

This still seems to leave the 4000 of this year's S&S ISA available and the 3600 (if you use 3600 for cash) next year available.

The cash ISA is fine for an emergency fund but it's not a great place for long term investing of large amounts of money because it doesn't stay far ahead of inflation, only allowing perhaps 1% income to be taken after allowing for inflation. Investments can deliver 5-6% income while keeping up.

April2

dunstonh wrote: »

You havent been using the £4000 ISA allowance left over then?

Left over?

I wish.

£18k gross doesn't go far so I'm proud even to have achieved £3000 into the cash ISA each year!

But yes, from now on ......

jamesd wrote: »

This still seems to leave the 4000 of this year's S&S ISA available and the 3600 (if you use 3600 for cash) next year available.

£3600? Have they increased the amount you can pay in?

Ah, yes, found it now.

http://news.bbc.co.uk/1/hi/business/6475891.stm

April2

Thanks for the replies.

There's still one thing I'm not really sure of (although my gut reaction is "don't bother").

That is, is it worth handing over, say £100k to a pensions provider or would doing be so be stupid because I could earn more 'investing' it privately?

EdInvestor

April2 wrote: »

That is, is it worth handing over, say £100k to a pensions provider or would doing be so be stupid because I could earn more 'investing' it privately?

It's not so much that you would earn more - you could earn about the same in net terms - but if you put the money into a pension you would a) lose the capital and b) have to pay tax on the income.

So not a good idea.