Investing for early retirement

davidpolzeath

I am looking to retire in June 2008 age 57 (or possibly the following year aged 58) Normal pension age is 60. My (abated) pension based on 35 years service will be £24k plus £72k lump sum but I’m aiming to maximise the amount taken as cash. My 56 year old wife is self employed with minimal Equitable Life pension. The only investments I have are £15k ISAs.
A colleague tells me that I should be investing in AVCs to get 40% (plus possibly 22%) tax relief. Should I borrow to do this and/or cash in my ISAs to add to my pot? I understand that I can’t increase the cash lump sum by doing this. If it just means paying more tax in retirement is there any point, except for the 40% portion?

Thanks

dunstonh

A colleague tells me that I should be investing in AVCs to get 40% (plus possibly 22%) tax relief.

You should ask them why. AVCs are largely obsolete now. FSAVCs no longer exist and in-house AVCs no longer have to be offered and companies are now beginning to withdraw them for new applications.

There is also no requirement at this time for in house AVCs to pay a 25% lump sum. Many have but many have not yet implemented that change.

Should I borrow to do this

Gearing as that is known is a high risk transaction. You can make significant gains but you can also make significant losses and with only a year to go it would be daft to borrow to invest.

cash in my ISAs to add to my pot

It would depend on what you are trying to achieve. ISAs are highly beneficial for retirement planning. Not so much cash ISAs when it comes to income provision but still some benefit. Unless the pension contributions give rise to benefits which are greater than those provided by the ISA and you are looking purely for income provision then you wouldnt do it.

sleepless_saver

Are you in a job where you can buy added years? If so, it would be worth doing the sums on buying as much in the way of added years as you can pre-retirement. This will attract tax relief at whatever your highest tax rate is, and would be taken out of your pay, so no need to touch the ISA.

CLAPTON

you need to clarify your objectives

-you seem to be saying that you want more cash (i.e. you are willing to sacrifice income in retirement for more immediate cash?)

if thats correct then using saving etc to pay more into a pension will do exactly the opposite.

if on the other hand you are willing to sacrifice cash for future income then spending on a pension can use tax relief to increase your income.

davidpolzeath

Many thanks for all this advice and I take the point that I need to be clear about objectives.

It sounds that it will be best to leave the ISAs alone.

I am planning to take the maximum cash that I can on retirement as this will be tax free when received. I can pass on most to my children and keep some in my wife’s name so that any interest would be tax free in the short term. Re: AVCs the thinking was that say if I could set aside around £1500 a month over 18 months this could fund a loan of (say) £24,000. At 40% this would add £40,000 to my pension pot and boost my annual pension?

dunstonh

At 40% this would add £40,000 to my pension pot and boost my annual pension?

Yes. But you would be kissing goodbye to £30k of it (assuming the obsolete AVC allows you to take a lump sum).

£1500 a month into stocks and shares ISA and unit trusts would build up a lump sum of £27,000 which is yours to keep (or pass in full upon death).

From an income point of view, the AVC will beat the ISA. From a capital point of view, the unit trust and S&S ISA is better.