Pension/investment advice

GSP

DairyQueen, what a load of dramatic rubbish.
I was in the same sort of place as the OP, but gradually learnt the spiel and lingo around pensions.
In what is one of the biggest decisions of your life, shouldn't you be made aware of all the options.
It seems the OP wants to look after his daughters and I was just making him aware there was something out there that might do that later on.
DairyQueen, I found your post offensive.

xylophone

shouldn't you be made aware of all the options.

A transfer out of the Police Scheme into a DC scheme is not an option.
See post 18.

GSP

Yes Xylophone, I am aware of that now.
My post was in relation to wrongly being called out and challenged as "encouraging to be irresponsible", where I believed I was offering advice.

kidmugsy

Now we have more facts let's start with forgoing the lump sum. By giving up £140k capital you would get an extra index-linked income of £7k per annum from age 53. That's far better value than you could buy commercially: if you already had enough capital to cover your proposed expenditure the sensible thing would be to take the bigger pension.

However, you do have a proposed plan of expenditure so unless you are prepared to fund it by borrowing - and many people your age would cry "no" - then you are probably going to take the lump sum. Therefore, on to the question of how to deal with the approx £63k:

The answer is "on two different timescales". The best investment you could make on the long timescale is very likely to be to make a series of pension contributions for your wife every year; crv1963 on post #10 explained this.


Because she is already past her 55th birthday the money won't be tied up - she can draw some down whenever she wants. But every annual £7.2k she contributes transforms into £9k in the pot because of the tax relief - even though she's not a taxpayer. Magic! Of course she still has to choose what the money will be invested in. I suggest that something like one of the Vanguard LifeStrategy funds might suit well. She chooses a degree of investment risk and then just leaves everything to grow (you both hope) without any need to intervene. This is called "passive" investing. And by investing annually (or indeed monthly) you are trickling the money into the markets and therefore (you hope) not taking the risk that would be involved in plunging it all in in one go.

The other timescale is the short term: where to keep the capital while £7.2k per annum is removed. The answer is probably "in the highest-interest savings accounts, regular savers, and current accounts you can find". Premium Bonds are not at all a daft idea, but you can do better since neither of you would need to pay tax on interest received. For example, a current account or regular saver that pays 5% p.a. interest is more attractive than PBs which are likely to pay out an average of about 1.25% p.a. in small prizes (plus a tiny chance of a big win). Remember to use both of you as openers of new accounts.

Once you've decided whether that's the direction you intend to take you can start a new thread asking for recommendations.

You could also ask about the pension wrinkles available to make best use of her position as a non- taxpayer. I don't think, however, that these are such a big deal as to influence your essential choices, namely

(1) To take the lump sum or not, and
(2) To use your wife's capacity to contribute to pensions as your main investing tool, or not.

bostonerimus

kidmugsy wrote: »

Now we have more facts let's start with forgoing the lump sum. By giving up £140k capital you would get an extra index-linked income of £7k per annum from age 53. That's far better value than you could buy commercially: if you already had enough capital to cover your proposed expenditure the sensible thing would be to take the bigger pension.

Assuming the OP lives another 30 years and 3% inflation they would have to get a 5.5% annual return from the 140k to equal the pension. I think the prudent thing is to take the extra pension if the OP can do without the lump sum and their is a survivor benefit. Some if the extra 7k each year can prepay the mortgage or be used for of the house fixes. The thing is you have the lifetime guaranteed income.

MK62

Don't forget that the £7000pa extra pension, in lieu of the £140000 tax free lump sum, would all be subject to basic rate income tax, and so would be £5600 rather than £7000 once that tax is taken off.

That brings the lump sum to 25x the net value of the extra pension.......which makes it more of an even decision.
One the one hand, £5600 pa extra pension, index linked for life isn't to be sneezed at, but then neither is having £140k deposited in the bank.
There may also be some other costs involved with taking the extra annual pension option, if the OP's stated plans are still on the table.......there would be no mortgage payoff, so that would still need paying (capital and interest).......the replacement car would have to be on finance......the daughter's gifts would have to be more piecemeal in nature........and the planned refurb may have to be a more gradual process if a home improvement loan is to be avoided.....and so on.

I think the key really is the OP's retirement plans.....

LHW99

I think the key really is the OP's retirement plans.....

and what income they need to live on in retirement, and how much would be left for one person if the other partner passes away.

kidmugsy

bostonerimus wrote: »

Assuming the OP lives another 30 years and 3% inflation they would have to get a 5.5% annual return from the 140k to equal the pension. I think the prudent thing is to take the extra pension if the OP can do without the lump sum and their is a survivor benefit. Some if the extra 7k each year can prepay the mortgage or be used for of the house fixes. The thing is you have the lifetime guaranteed income.

I agree but I suspect the OP won't. He'll be surrounded by colleagues telling him "it's all tax-free" and hymning the praises of BTL. Not one will describe the notion I explained earlier, of securing both the bigger pension and the expenditure by increasing his mortgage rather than paying it off.

Mind you, if he does build up his wife's pension she'll get the 25% boost on the way in (£80 -> £100) and pay no tax on the way out, so that does make investing there a seriously attractive wheeze. And if good sleep depends on having no mortgage, so be it.

OP should check, but in many DB pensions the widow's pension does not alter according to how big a lump sum you take.

Deneb

bostonerimus wrote: »

Assuming the OP lives another 30 years and 3% inflation they would have to get a 5.5% annual return from the 140k to equal the pension. I think the prudent thing is to take the extra pension if the OP can do without the lump sum and their is a survivor benefit. Some if the extra 7k each year can prepay the mortgage or be used for of the house fixes. The thing is you have the lifetime guaranteed income.

As a current recipient of a police pension I completely agree with your thoughts on not taking the lump sum.

Survivor benefits are however based on the full pension entitlement before commutation; whether any lump sum is taken or not makes no difference to a surviving spouse's pension entitlement.

Taking the lump sum is also not a binary option. It is possible to nominate any amount of lump sum between zero and the maximum.

I commenced my pension in 2011, and still have an outstanding mortgage of around £35K. I took just enough lump sum to cover that debt, and put the money into fixed rate cash ISAs split between Mrs D and myself, currently earning 3.05% interest, with the interest only mortgage debt costing 1.74% (since last August, as tied to base rate plus 0.99%).

I realise it will be very difficult (impossible) to obtain those sort of figures in today's environment without more risk, but mention it as another option.

We also have capital in funds and other investments, but to my mind there's a lot to be said for keeping as much as possible in the pension where it will accrue annual CPI increases at no risk to the recipient and without stressing over investment decisions and performance.

With the benefit of hindsight, having had an income from other employment until I fully retired last year, and now a small additional pension, I probably wouldn't have taken any lump sum at all if I could choose again!

Edit: Kidmugsy obviously types quicker than me!

k6chris

Deneb wrote: »

Taking the lump sum is also not a binary option. It is possible to nominate any amount of lump sum between zero and the maximum.

If this is the case, and I have no reason to doubt it, then it would seem that a very sensible option, given the OP view on risk, would be to only take minimum TFLS they need and take the rest as DB pension payments. This would put them in a very strong financial position which would seem to meet their needs and risk profile??