Best way to invest £120k

nsum88

Hi,

My dad is due to retire in November and can take part of his pension as a lump sum. The maximum he can take is approx £120k. Looking for some suggestions on the best way to invest this. He's thought about buying property and reselling to make a profit, but just wondering if there are any other good ways to invest, with interest rates on savings being so low.

Thanks

Linton

The best way to invest that sort of money for the long term is in my view investment funds investing in the world's stock markets. However what is best for your father depends on his detailed circumstances, objectives/ timeframes, and attitudes to risk. If he has no knowledge whatsoever it may be worthwhile consulting an Independent Financial Advisor.

theoretica

As a benchmark, if he didn't take it as a lump sum, what sort of a return would he get on it within the pension?

enthusiasticsaver

My OH retires next month and will also receive a large tax free lump sum. He is not savvy moneywise and is cautious so I have outlined a few options. We saw an IFA re his pension package but were not impressed and as I am more familiar with investing we have decided not to use one. As Linton says though if neither your dad nor anyone else in your family is familiar with investing this is an option but shop around and go on recommendation for an IFA. He also needs to bear in mind whether the rest of his pension will cover his essential expenditure or whether he will need to leave part of the capital accessible as back up funding.

Buying property, renovating it and selling is expensive. £120k though will not buy a lot unless he is going to borrow or he lives in a very cheap part of the country. BTL which some people think is a gold mine is now very much a regulated industry and there are tax implications so if this is something he wishes to do he needs to do a lot of research first. Bear in mind if he is going to borrow to buy property he needs to factor in interest on loan and amount of time and fees for selling plus however much it will cost to renovate. Property developing is not for amateurs unless he has some special skills - ie builder, electrician, plasterer or whatever. Just buying and reselling will not make a big profit and it may be wiped out just by agents and solicitors fees particularly as we do not know how Brexit may influence house prices. My feeling is that this is a risky investment.

Investing in a well diversified balanced portfolio would be my recommendation depending on how much of the money your dad is willing to put away for at least 5 years. There are lots of multi asset portfolios out there to cover shares, bonds and even corporate property. He can choose his level of risk but do bear in mind that there are no guarantees with investments.

If he does not want to lock it away then he is better off looking at high interest current accounts as much as possible and national savings. No more than £75k in one banking group.

Personally we are choosing to invest 75% of my OHs lump sum and keeping 25% back to spend on a car, maybe some home improvements and a holiday.

nsum88

The reason he feels it'd be better to take the lump sum, is because he won't have to pay tax on it. If he leaves it in the pension pot he'll have to pay tax on it, so his thought is right away by taking the lump sum, he's saving 20% tax on the portion he's taking out. The lump sum isn't the whole pension, it's just the maximum he can take.
I'm not sure if this answers your question, but doesn't know off the top of his head how much he'd be able to draw as a pension per month.

Linton

nsum88 wrote: »

The reason he feels it'd be better to take the lump sum, is because he won't have to pay tax on it. If he leaves it in the pension pot he'll have to pay tax on it, so his thought is right away by taking the lump sum, he's saving 20% tax on the portion he's taking out. The lump sum isn't the whole pension, it's just the maximum he can take.
I'm not sure if this answers your question, but doesn't know off the top of his head how much he'd be able to draw as a pension per month.

Is it a Defined Benefit ("Final Salary") Pension or a Defined Contribution Pension where there is a pot of money?

If its DB it may be in his interest to exchange the lump sum for a higher pension even with the tax hit. It all depends on the details.

If its a DC pension then he could leave the money where it is where it can continue to increase in a tax free environment. If he takes it out, any investment he buys could be taxable (especially a BTL). It would take several years to move the money into an S&S ISA.

Pincher

I assume the pension is not final salary, so it's a pension pot that is already invested. Leave the £120k inside, and it grows tax free.

So, if you take it out, it needs to grow more to stay even.

Theoretically, it grows merrily away, tax free, and you only draw down what you need, and pay tax only on the chunks you take out.

Just in case, check that they don't move the money to some safer lower growth fund, FOR YOUR DAD's PROTECTION.

Personally, I would like a tribe of genetically engineered honest people, who cannot cheat and steal from investors without suffering brain haemorrhage, to manage a With Profits fund, which can only grow, and never fall, when I reach retirement.

nsum88

It's a final salary pension, and he said it won't grow if it's left in the pension pot. This is why he thinks he's best to take the maximum lump sum cause it'll decrease in value left in the pot, and he'll pay tax on it when it's drawn.

Linton

nsum88 wrote: »

It's a final salary pension, and he said it won't grow if it's left in the pension pot. This is why he thinks he's best to take the maximum lump sum cause it'll decrease in value left in the pot, and he'll pay tax on it when it's drawn.

As its a final salary pension he will almost certainly have to take the lump sum at the same time as starting to receive the pension.

Can he choose to take a larger pension in exchange for a smaller lump sum? It could be worthwhile checking out the numbers. With some DB pensions, particularly government ones, the extra pension can be worth significantly more than the lump sum even after tax.

bigadaj

nsum88 wrote: »

It's a final salary pension, and he said it won't grow if it's left in the pension pot. This is why he thinks he's best to take the maximum lump sum cause it'll decrease in value left in the pot, and he'll pay tax on it when it's drawn.

He may be right, he may be wrong, depends on the exact scheme rules.

He needs to find out the commutation rate and how much he has to take as a lump sum, if any at all. With this infirmation it will be easier to determine what might be the better option.

xylophone

Your father needs to look at the specifics of his scheme/the commutation rate/his monthly pension/his tax position etc.

I knew one person who had a very specific reason for taking the maximum commutation on a generous fully RIP indexed DB pension.

The CR was in excess of 20:1, even after commutation he would be left with an ample pension and he wanted to gift the lump sum in the hope of a PET.