Retirement lump sum

Lyncj01

I was also in the same position last year. I would also factor in the fact that if you take the max lump sum out and die (sorry to be so morbid) then this cash is part of your estate; your ongoing pension may be reduced if you leave a spouse (typically 1/2) or lost all together if you do not have a dependant. I took all of this into account, took good financial advice and actually transferred out.

kidmugsy

At the risk of taking you too literally, here goes, inspired by the Harry Browne Permanent Portfolio.

About 25% in cash. Aim for as high a tax-free interest income as you can; therefore use high interest current accounts and regular savers, maybe some fixed-term, fixed-rate accounts, perhaps some 60-day or 90-day notice accounts. Be sure to use your spouse's capacity for high interest too.

About 25% in government bonds. The aforesaid Harry lived before index-linked bonds were available; I suggest some sort of fund or ETF holding global inflation-linked bonds. It removes the certainty Harry sought by buying US Treasuries directly, but our equivalent to his idea would be buying fixed interest gilts directly and I think I'd find the returns too low. But maybe you'd prefer a mixed bunch of fixed interest government debt from, say, the governments of the UK, US, Norway, Sweden, Switzerland, and Singapore? Or Australia and Canada and Norway too? You'd have to discover whether there's a supplier of a good, cheap way to own such stuff.

About 25% in gold. There are various ways of achieving this. One low-faff way might just be to buy some gold sovereigns and store them somewhere safe. Have a look at the Royal Mint website to get the drift of things and then look at some of the other suppliers who have been mentioned on the threads here from time to time.

About 25% in equities. Harry meant American "blue chips", being an American of some time past. Instead I'd suggest probably "tracker" funds or ETFs covering, say, Far East/Pacific, Japan (amazingly often omitted from FE/Pac), UK, US, and maybe also Switzerland, Sweden, Canada, Australia, .... If you think that the break-up of the Eurozone won't be too much of a disaster then you might even put a little into Eurozone equities too.


Or, hand the business of capital preservation over to a couple of firms dedicated to that activity. Visit the websites of Personal Assets Trust and Ruffer Investment Company, read their copious reports and reviews, and decide whether you'd like to trust them with part of your capital.

P.S. Linton is right.

short_butt_sweet

kidmugsy wrote: »

At the risk of taking you too literally, here goes, inspired by the Harry Browne Permanent Portfolio.

IMHO, a really bad suggestion.

the harry browne portfolio is a high-conviction portfolio, in the sense that it is very uncomfortable to stick to it. at any one time, at least one part of it is likely to be performing badly. and it requires you to keep trimming the better-performing parts to top up the worse-performing parts. which will often feel like pouring money down the drain. this is a totally unsuitable suggestion for the OP, who expresses caution about investments in general, let alone this portfolio which requires conviction, and rather specific conviction.

you're also fiddling with the harry browne portfolio unnecessarily. i'm not a big fan of it, but one of its virtues is its relative simplicity, and you're throwing a lot of that out the window. (if you're going to fiddle with it, IMHO it would be better to reduce the scarily high amount it puts in gold.)

also, why are you suggesting this when you clearly don't hold it yourself? i'm puzzled

planefixer

Audaxer wrote: »

I know the lump sum is tempting, but as you want to take it to invest rather than have a need to spend it, it is firstly worth checking the commutation factor of the DB pension. That is how much lump sum you are getting compared to how much pension you are giving up. If you are getting more than £20 lump sum for every £1 of pension you are giving up, then it may be worth taking it to invest. If it is under about £15 lump sum to every £1 of pension given up, then I would say that is not a very good commutation rate, and it would be better to take the full pension. Can you tell us how much your pension would be if you took the full pension with no lump sum, and we will be able to work out the commutation rate?

If the commutation factor is good and you do decide to invest, you would be as well doing some research on here and sites like Monevator about learning to DIY invest, as consulting an Independent Financial Advisor will be expensive and eat into your lump sum, thereby reducing returns.

Yes Im more than happy to tell you and thanks for the offer.

Full pension is 36,321.14 pa

reduced pension is 27,998.62

PCLS 186,657.47 72% of life time allowance.

planefixer

Just wanted to thank you all for input so far, I haven't made any decision yet so all options are open. I really appreciate all of your ideas and advice. Thank you.

planefixer

Im not the greatest at maths but using the figure I posted in the reply to Audaxer I work out my commutation rate to be £22.42. Anyone care to check my working out please? If I'm correct is this a good rate?

Audaxer

planefixer wrote: »

Yes Im more than happy to tell you and thanks for the offer.

Full pension is 36,321.14 pa

reduced pension is 27,998.62

PCLS 186,657.47 72% of life time allowance.

That is certainly a good DB pension as the commutation factor works out at 22.43. If you took the lump sum and invested it, you would only need it to provide a net annual income of 3.57% to match the pension. Such an income is certainly achievable from an investment portfolio over the long term, but not guaranteed like your pension. Assuming your pension is index-linked to RPI or CPI it will increase with inflation, so the investment income needs to match or better that. About a year ago I set-up an income portfolio within an S&S ISA and it yields an income of about 3.6% after charges. The income will hopefully grow over the years, but the capital balance fluctuates and could suffer big losses after a 9 year bull run of mainly rising markets - so I expect big falls within the next few years, but hopefully the dividends won't suffer that much, and in the long term the capital should recover.

My DB pension is index-linked to RPI but most of it is capped at 2.5% increases, so not that good if inflation rises above that, so I would check that on your pension.

If you need a guaranteed income of £36k per annum I would go for the full pension, but with that commutation factor it is tempting to take the lump sum, or a percentage of it, and invest it putting the maximum in S&S ISAs each year - up to £20k per annum for both you and your spouse. However if you consult an IFA you might get good advice but it will cost a lot, so net returns to match the pension may be more difficult to achieve, so it would be worthwhile also reading up a bit about DIY investing before deciding whether to take the lump sum and invest it.

Edit: just to confirm the 3.57% return required is based on the difference between your full pension and reduced pension after deduction of 20% income tax, i.e. you need to achieve additional income of £6,658.02 per annum to match the full pension.

planefixer

Audaxer wrote: »

That is certainly a good DB pension as the commutation factor works out at 22.43. If you took the lump sum and invested it, you would only need it to provide a net annual income of 3.57% to match the pension. Such an income is certainly achievable from an investment portfolio over the long term, but not guaranteed like your pension. Assuming your pension is index-linked to RPI or CPI it will increase with inflation, so the investment income needs to match or better that. About a year ago I set-up an income portfolio within an S&S ISA and it yields an income of about 3.6% after charges. The income will hopefully grow over the years, but the capital balance fluctuates and could suffer big losses after a 9 year bull run of mainly rising markets - so I expect big falls within the next few years, but hopefully the dividends won't suffer that much, and in the long term the capital should recover.

My DB pension is index-linked to RPI but most of it is capped at 2.5% increases, so not that good if inflation rises above that, so I would check that on your pension.

If you need a guaranteed income of £36k per annum I would go for the full pension, but with that commutation factor it is tempting to take the lump sum, or a percentage of it, and invest it putting the maximum in S&S ISAs each year - up to £20k per annum for both you and your spouse. However if you consult an IFA you might get good advice but it will cost a lot, so net returns to match the pension may be more difficult to achieve, so it would be worthwhile also reading up a bit about DIY investing before deciding whether to take the lump sum and invest it.

Edit: just to confirm the 3.57% return required is based on the difference between your full pension and reduced pension after deduction of 20% income tax, i.e. you need to achieve additional income of £6,658.02 per annum to match the full pension.

Thanks so much for checking that for me. It certainly has given me something to think about. We will be mortgage free and taking the lower pension will certainly be manageable for us taking into account my wife's modest pension too. I will now switch my attention to learning how to DIY invest and all the other options you and others have mentioned. Thanks again.

Audaxer

planefixer wrote: »

Thanks so much for checking that for me. It certainly has given me something to think about. We will be mortgage free and taking the lower pension will certainly be manageable for us taking into account my wife's modest pension too. I will now switch my attention to learning how to DIY invest and all the other options you and others have mentioned. Thanks again.

As your wife has a modest pension that might be another reason to consider taking a lump sum, as with most DB pensions, if the pension holder dies, the spouse is still entitled to 50% of the full pension, even if you take the lump sum with reduced pension, so worth checking the small print.

planefixer

Yes if I die she gets 50% of the full pension amount.