Advice on where to put my 25% lump sum

aphill24

Hi All. My first ever question regarding pensions so please be kind. I have been reading the forum for a few weeks and have gained some knowledge thanks to all the members.

I am very likely to be out of a job in the next two years. My situation is I have a DB company pension which I have been paying into for 29 yrs. I am 53 next January so hopefully when the push comes I will be 55 yrs old and able to access my DB pension. The NRA of the pension without penalties is 58 yrs but if I lose my job the history from other plants has shown that the pension will be paid up in full as if I worked to 62 yrs of age. Hope this make sense?

From experience of fellow workers retiring I can expect a pension around £350 per week and a tax free lump sum of around £100k This could well be more in both cases if my employer up's sticks and hands out more generous terms but i don't want to count on my chickens before they are hatched.
My main point is what should I do with the lump sum to give me as much drawdown as possible for a term of 25 yrs say from 55 to 80 yrs of age. I don't expect to be needing it to last any longer than this as I will have the DB pension which is indexed linked to live on.
i have paid off my mortgage and the only big expense I can foresee in future would be something like a new car or possibly a caravan to enjoy in retirement.
Should i invest in in a drawdown scheme to hopefully get around 5% but would I then be paying tax on the amount drawn down? or should I just put it in isa's and saving accounts and draw money out every month to top up my £400 per week from my DB pension.
At 55 yrs of age with a daughter in uni £400 is not enough for what I need.
I have also been saving into AVC for two years rather than pay 40% tax and have 4k saved will hope to have 10k there at 55 yrs old which i was hoping to use to pay for my daughters wedding one day. i understand I will pay tax on 75% of this at 20% but it still better than the 40% I would be paying now on the weekly sum If I never started the scheme.

Sorry for the long post but any advice is welcome please to save tax where ever i can?

Linton

Do you have the option of a smaller lump sum and a higher pension?

If you have to take the £100K and you are married, at £20K/year each it will only take you 3 years to get the whole lot into S&S ISAs from which all income will be tax free. For £100K it could be worth your while talking to an IFA who would be able to advise on appropriate investments to provide a sustainable income. Cash would not be very sensible as it will lose value over time because of inflation.

aphill24

Thanks Linton. Yes I will have the option of taking no lump sum and a higher pension. There are four choices
25% TFL and £350p/week ( I did state £400 sorry but rather forcast £350 to err on the cautious side)
No TFL and £xxx I am not sure what this is as nobody I know has not taken the option. I believe it takes around 12 years to claw back the TFL and is around £8k more a year as a pension. I will try to find out more details on this.
The other two options consist of a higher pension that drops when state pension kicks in at 67 for me or a lower pension but will benefit from the additional state pension later on.
I am married My wife works part time and has a small DB pension.

Linton

If it's a clawback time of 12 years and with a average life expectancy of 85 or more it seems the best use of at least some of the £100K would be to get extra pension, unless you need the cash for yourself or want to leave more to your beneficiaries at some cost to you whilst you are still alive. You cant expect to get an 8% income from investments.

aphill24

I can't imagine not taking the cash free lump sum, as i would never have the chance to accrue and enjoy the freedom of such a sum of money again. I just want to know what would be the best place to put the money to gain as much tax free return knowing I always have the sum there for big purchases if needed.
I have now got figures from a workmate who has retired on normal terms at 56yrs and has deferred his pension for 2 years until he reaches 58yrs where there are no penalties:
Option Pension TFL
1 £22,000 Nil
2 £14,500 £96,600
3 £25,500 (£19600) NiL
4 £18,100 (£12,200) £96,00
The figures in 3&4 in brackets are what the annual pension drops to when state pension kicks in.
Most workmates go for option 4.
What do people think of these options? what would you do?

Linton

For what to do with £100K see my post #2 paragraph 2.

As to what I would do, assuming no other savings/investments....

See if there is an intermediate option of say £30K lump sum with a proportionate pension and then go for the pension based on a higher rate prior to state pension age. Compared with the annual income lost £100K seems an excessive amount to make you feel good and the odd big purchase. Wouldnt £30K do the trick?

Something that should be thought about before making the decision - how much income do you need to support your desired standard of living? If £18K/£12K+2 state pensions is more than adequate then you may be able to justify a larger lump sum, otherwise otherwise.

jamesd

aphill24 wrote: »

I can expect a pension around £350 per week and a tax free lump sum of around £100k ... My main point is what should I do with the lump sum to give me as much drawdown as possible for a term of 25 yrs say from 55 to 80 yrs of age.

I describe a mixture of protected and secured peer to peer lending options that combine to produce about 7% income here, so potentially £7,000 a year of interest. That selection is for the lower risk end of P2P, with limited amounts in the higher paying pieces and more is possible by adjusting the portions in the mixture. The interest available will depend on market conditions so it'll vary. This assumes no drawing on capital, over twenty years you could do a significant amount of that, adding perhaps £2,000 a year.

Since your primary need seems to be providing an income until the state pension starts, to get a more level income, you might instead plan on adding the work DB and state pension amounts and drawing on capital to top up the DB to the combined value of both, to get you a level income. This won't last for twenty years but will provide more money when you most need it.

Another option is to ask for a transfer value CETV now and again after any topping up that you anticipate. A reasonably typical transfer value might be 30-35 times the maximum income payable by the pension if no lump sum is taken. Then you could look to transfer out the whole value of the DB pot and use income drawdown, with state pension deferring to get you say £4,000 of extra guaranteed state pension, or about twice that if you have a spouse. This assumes normal good health, a state pension that starts at £8,000 and ten years of deferring costing £80,000 to replace it for the ten years, ignoring inflation for simplicity.

aphill24 wrote: »

I am 53 next January so hopefully when the push comes I will be 55 yrs old and able to access my DB pension. The NRA of the pension without penalties is 58 yrs but if I lose my job the history from other plants has shown that the pension will be paid up in full as if I worked to 62 yrs of age.

It seems as though your initial key challenges are accumulating sufficient money outside a pension to last you until at least 55 and either outside pensions or in a non-work pension to last you until either age 58 or until a transfer of the whole DB pot after its paid up. What financial resources do you have to do that? How much can you invest as fast as possible to get there?

A possible tool is 0% for purchase credit card deals, available for terms up to three years. That can get you some cheap borrowing for a while, until a lump sum can repay it.

aphill24 wrote: »

i have paid off my mortgage

Sadly common for people to hobble themselves like that. You could really do with having the money so you could use it to live on for a few years, until you can get at the maximum work pension value.

aphill24 wrote: »

Should i invest in in a drawdown scheme to hopefully get around 5% but would I then be paying tax on the amount drawn down? or should I just put it in isa's and saving accounts and draw money out every month to top up my £400 per week from my DB pension.

Drawdown would normally involve using a mixture of money put into ISAs and money still in a pension pot. It's just one big pot of money kept in different places.

While money being drawn from a pension pot is taxable, there is often no tax to pay. That's because your normal income tax personal allowance applies and makes £11,500 a year tax free. Plus anything being taken from the ISA or 25% tax free lump sum.

From the look of your numbers you're expecting a pension income at a level that might provide a transfer value of between £660,000 and £770,000. That sort of pot could provide an annual income of above £40,000 a year, subject to investment returns, allowing for the effect of the state pension. There are some examples of how to use cfiresim to calculate potential drawdown income levels linked from this post.

What I would do is easy: find out the transfer value and if it's sensible, transfer once the pot value has been increased following the other plant example, and use income drawdown, because it's likely to provide around twice the income level after including the effect of the state pension when that starts.

aphill24

There is no option other than 25% TFL or Nil. I will read as much as I can regarding S&S ISA ready for when I might need to invest.
Thanks for the heads up.

I will make a separate post for what people think of the two work mates I know who have asked for CETV it's certainly not something I would entertain but you wouldn't believe the interest in this from the workforce now that figures of 550k are being banded about

jamesd

Why isn't it something that you would entertain? There seems to be an excellent chance that it would dramatically change your life for the better. No surprise that there is a great deal of interest in it from the workforce, it's likely to be very beneficial.

xylophone

Have you and your spouse obtained state pension statements?

https://www.gov.uk/check-state-pension

bostonerimus

aphill, do you have any savings outside of the pension in something like an ISA? Do you intend to fully retire if you get laid off in 2 years time? Could you find another job? These would be ways to fund the 3 year gap between 55 and 58.

I applaud you being 53 and having no mortgage. Many people look at the difference between mortgage rates and potential investment returns and say it's a bit foolish to pay off such a low interest loan. However, having no mortgage in retirement takes a lot of pressure off income generation and as you also have a DB pension you are in a nice situation. In a time of low bond rates think of paying off a mortgage as part of your fixed income investment. If you have also saved something to an ISA you'll be golden.