Pension/investment advice

Trinity_Phil

Hi guys, newbie here so please be gentle....
I am a serving police officer and am due to retire in February having completed my full 30 years service so will qualify for maximum pension which will be approx. £140k lump sum and circa £19k p.a. pension.
I am looking at taking the full lump sum and using £35k to pay off our mortgage which will then leave us debt free.
We have 2 grown up daughters and I am wanting to give each of them £10k and am also looking at re-decorating/refurbishing the whole house, and possibly spending around £15k on a new car, so estimate after this I will have approximately £60-£65k leftover ??
I want to invest this somewhere safe (it's taken me 30 years to earn it, so don't want to risk losing it !!).
Once the decorating/refurbishment is done, then I will be looking at getting a part-time job, possibly 3 days per week just to top up my pension.
Firstly, is taking the full lump sum the best thing to do, and secondly where should I be putting the £60-£65k and thirdly I assume that tax will come into the above calculations at some point ??
I am enrolled on a 2 day financial awareness course next week, so will obviously be getting some pointers there, and my mum and step-dad are recommending buying premium bonds as they average around £50-100 per month in winnings from theirs, but just wondered what advice people on here are recommending ??
Thanks...Phil.

AlanP_2

What sort of risk are you prepared to take as all your choices fall somewhere along a risk continuum?

For example - Keeping it in cash under the mattress is low risk except for you might get burgled and you will lose out to inflation.

At the other end of the risk scale you could put it on the 4:30 at Kempton - High risk of losing it all but a massive return if it pays off.

Cash will earn a bit of interest and may keep up with inflation so no loss / no gain. Equity / Bond investments as part of a diversified portfolio should return above inflation returns over say 10+ years.

What are your plans / objectives for the £65k and what sort of timescale?

Trinity_Phil

Alan...thanks for the prompt reply...what I forgot to say on the original post is that I am totally clueless when it comes to financial matters, so really have no idea what to look for !!
I have never been a gambler and being a true Yorkshireman am tighter than a duck's bottom when it comes to spending money, so just want to put it somewhere safe where it will earn me the maximum amount possible ??

crv1963

Hi Phil,

Glad to come across someone even later to the pensions learning curve than me! I'd start by reading a few threads:Pensions Planning: The NUMBER- or the Early-retirement wannabe- threads got me thinking on our plans.

Look basically at four things-

1) How much income do you need vs what you'll get as a pension?
2) What are your plans once retired?
3) What is your wifes pension provision- minimizing tax to pay?
4) Is either of you able to continue with retirement comfortably if the other dies?

Women tend to live longer with smaller pension pots/ income generally so maybe you need to look to increase your wife provision using some (there are threads discussing the "recycling rules") into a pension fund for your wife.

We worked out our minimum needs, then what we'd like to have to enable us to do what we want to do when retired. Also you need to look at your risk tolerance, maybe save some/ most of your part time earnings (edit used the word savings by mistake) into a SIPP with a higher risk level than your lump sum money?

You could put 20k each into an ISA when you get your TFLS as you know that you will have that much at least left over after your current plans are completed, and have time to research further.

Look at it all in the whole, going from working in a team means you have to fill your own day with meaningful activity after 30 years of someone else planning (or not) it for you as well as the financial side.

But with your Police Pension, followed later by your SP(s) you're in a great position to make a great retirement.

tacpot12

The safest place you can invest the remaining money is in your police pension; you haven't said how old you are, but if you expect to live another 20 years, reducing the amount of the lump sump and increasing the amount of pension you receive will be the best option as you will get a return linked to CPI at no risk.

Only if you are in ill health would it make sense to take the maximum amount of lump sum.

Do you really need a brand new car, or would an older car and more pension to run it (and replace it when it gets old) make more sense?

Can you afford to live on your pension if you give £10K each to your daughters? Your daughters might be happier knowing that you have enough to live on rather than having an unexpected windfall from you.

xylophone

Will your part time job offer a pension scheme?

You might consider making more than the minimum contribution into it.

Trinity_Phil

Thanks for the replies, guys....I'm 53 years of age, so hopefully will be around for a good few years yet !!
I should have said "replacement" car, rather than "new" and £15k is my upper ceiling rather than a target and I would be looking at maintaining it myself as I am also an ex-mechanic and like tinkering.
The wife currently earns around £9k p.a. working part-time and has no plans to retire at the moment, but her pension is barely worth mentioning as I don't think it even comes to £1000 p.a.,so with my pension, her wage, lack of a mortgage and eventually my new part-time job, we should be okay for day-to-day finances ??
I am having to Google all of these acronyms (SIPPS,TFLS,CPI etc etc) as I really haven't a clue what they all mean, so please go easy on me guys !!

OldMusicGuy

First, understand the difference between savings and investments. Savings (provided you go with a bank, building society or similar that is covered by the FSCS compensation scheme) are safe up to £85K per bank/building society you save with. There is zero risk but the rates of interest on offer will be below the current rate of inflation. So although the money is safe, its value will gradually go down over time.

Investments all involve some form of risk. You can invest safely in well-diversified funds that include equities and bonds that are managed by very large companies. You will generally get better, above-inflation returns in the long run (10 years plus) but in the short term you could see some big swings both up and down. So although the investment is safe, the value could swing quite a lot. For example, if you had invested the £140K a couple of weeks ago, even in lower risk investments it would probably be worth around £134K today as the market has taken a small tumble. It will likely get that back (and more) over time, but how would you feel if you saw that happen to your money?

So would you either save the lump sum and see it gradually erode over time or risk investing it and perhaps see it grow over inflation. Only you can decide. Maybe a mix of both.....

You need to do some serious financial planning. Look at your income, your partner's income and your state pensions over the next 30+ years and see if they will support the lifestyle you want to lead. That will help you decide if it makes sense to take the lump sum up front or have a bigger pension income in the long run.

Finally, do some reading. Educate yourself about investments. I always recommend this book: "DIY Simple Investing: A Guide to Simple but Effective Low Cost Investing" by John Edwards. It will help you understand all of the jargon and help you with the choices you need to make.

bostonerimus

If you don't take the lump sum what increase in pension would you get?

If you do take the lump sum I would not immediately spend it on the mortgage, home improvements a car of on gifts to children. I would want to invest it and use any returns to overpay the mortgage etc.

You have not given us any indication about your tolerance for risk are you ok with a stock market investment that will probably make you the most money over time but will also go up and down.

crv1963

Trinity_Phil wrote: »

Thanks for the replies, guys....I'm 53 years of age, so hopefully will be around for a good few years yet !!

The wife currently earns around £9k p.a. working part-time and has no plans to retire at the moment, but her pension is barely worth mentioning as I don't think it even comes to £1000 p.a.,so with my pension, her wage, lack of a mortgage and eventually my new part-time job, we should be okay for day-to-day finances ??

I am having to Google all of these acronyms (SIPPS,TFLS,CPI etc etc) as I really haven't a clue what they all mean, so please go easy on me guys !!

So you have to pay a few years National Insurance(NI) yet to get a full State Pension(SP) at 67 years old, worth 8.5k pa. Is your wife 53 too? Assuming so and that she too will work until she has full SP it'll be 19k+1K+8.5K+8.5K= 37k joint pension income. So try to look at getting near that level of income earlier.

Your wife could put 7.2k pa into a Self Invested Personal Pension (SIPP) get tax relief so it becomes 9k saved. You could achieve this by putting her earnings into pension, draw 7.2k pa from your lump sum to use to replace it. This means effectively you get 20% interest on this amount just it's locked away until 55 at the earliest.

So if you do this for 7 years she'd have 63k (assuming no growth because it's in a cash sipp. then she retires and takes it out at a rate of 8.5k pa (equivalent of her SP) pays no tax and you have roughly 100 per month more income. After 7 years you still have a little left (3.5k) in her SIPP pot.

Alternatively you could save all of your part time job money into a SIPP- put 7.2k into your wifes SIPP first to save tax when you draw it. You could then save the rest of your part time earnings into a SIPP for you, but as your going to pay tax on your Police Pension you will pay it on your SIPP pension too.

So if your part time post pays you 18k and you save it all into SIPPs you don't need to touch your lump sum, and end up with a SIPP pot of 63k each, both retire at 60 and draw down the equivalent of your SPs age 60 to 67.

Just one of the many ways you could do it. Play with figures and see what you come up with.

Good luck, took me a while to get my head round it all and learn the abbreviations!

kidmugsy

Trinity_Phil wrote: »

am due to retire in February having completed my full 30 years service so will qualify for maximum pension which will be approx. £140k lump sum and circa £19k p.a. pension. I am looking at taking the full lump sum and using £35k to pay off our mortgage which will then leave us debt free.

We have 2 grown up daughters and I am wanting to give each of them £10k and am also looking at re-decorating/refurbishing the whole house, and possibly spending around £15k on a new car, so estimate after this I will have approximately £60-£65k leftover ??

Once the decorating/refurbishment is done, then I will be looking at getting a part-time job, possibly 3 days per week just to top up my pension.

Firstly, is taking the full lump sum the best thing to do, and secondly where should I be putting the £60-£65k and thirdly I assume that tax will come into the above calculations at some point

my mum and step-dad are recommending buying premium bonds as they average around £50-100 per month in winnings from theirs, but just wondered what advice people on here are recommending

The lump sum: there's a case for taking out enough for the refurb, the mortgage, the car, the daughters, and for having an emergency cash account. By the time you make pension contributions for your wife - an excellent suggestion - you may feel that you might as well take the lot.

With the part time job make sure you earn enough that you get credited with National Insurance Contributions (about £8.5k does the trick) so that your eventual State Retirement Pension isn't penalised.

There is another approach: don't reject it out of hand - give it some thought. Don't pay off the mortgage. In fact replace it by a much larger interest-only mortgage running to (say) age 85. Then don't take the pension lump sum at all: use the mortgage cash to pay for the refurb, the car, your daughters, your wife's pension contributions, and for having an emergency cash account.

Why? Because then you will have effectively invested the lump-sum-that-would-have-been into the pension with no investment risk. You'd expect to start paying off the mortgage when your State Pensions begin; age 67 to age 85 for two of you should give you ample funds to clear off that mortgage.

So: how much bigger would your pension be if you took zero lump sum? Is your house valuable enough to let you contemplate this scheme? How old are you both?

It would (I hope) need you both to agree to such an unconventional idea. But it's worth thinking about. It effectively shifts a lot of income from your seventies into the immediate future. If you are tempted you'd want to work out how to use life insurance to help the survivor cope if one of you should die early. But maybe you should be doing that anyway.

There you have two extreme cases: (i) take max lump sum, clear the mortgage, and so on, or (ii) increase the mortgage and pay it off when you have surplus income in your late sixties onward. You might fancy settling for a compromise between the two.