Vanguard Life strategy 40 vs HL Active ISA savings

Carefulspender1

Hi Everyone. I'm approaching retirement next year, I already have a small amount of funds in a Hargreaves Lansdown Sipp Cash Account and intend to transfer a small Pru pension into the same account. I will have a total of around £22k in there then. Apart from a small defined benefit pension that will top up my state pension by £200 per month that's all I'll have.

Because I only have a small amount I was told by Pension Wise that it would not be cost effective to use an IFA, however, I have had an informal chat with an IFA as a favour who suggested I combine the money with HL, take the 25% tax free lump sum and invest the remainder in a Vanguard 40 or 20 plan. Looking at it I am reluctant to do this as I can't afford to lose any of the invested amount in the event of another big dip in the various markets it invests in. I was therefore looking at putting the money after the tax free lump sum into the HL Active savings Cash Isa, perhaps some in a fixed account and some in an easy access account as I may need to draw on it in the next 5 years.

My questions are - is this a good option? Does moving the money into the ISA mean it is in drawdown and the balance after taking the 25% tax free lump sum will be taxed before it goes into the Active Savings? Are there any other things I need to consider? Does anyone have any other recommendations?

A lot of questions for a Sunday afternoon I know but if anyone can shine more light it would be really helpful. 

Albermarle

Firstly transferring your Pru pot to HL is probably a good idea. The Pru do not have the best reputation for customer service and it will be easier dealing with HL in general.

First question then is why take the 25% tax free lump sum? For sure you do not have to take it at any particular time.
If you do not need it for anything specific it can be happily left where it is.

One problem with the cash ISA idea, is that you will have to withdraw the money from the SIPP. The 25% will be tax free, but the rest will be potentially taxable. A lot depends on your tax position/other income whether this might cause problems. It could be better to wait until you stop work, although it depends when the state pension is due as that is taxable as well.

The second issue is that over the long term, invested funds are likely to outperform cash savings.
However if you think you will need all this money in the next 5 years, then holding it in cash may well be a good idea.

Thirdly you can keep cash within the SIPP and still get a reasonable ( but not the best) interest rate on it.

Carefulspender1

Albermarle said:

Firstly transferring your Pru pot to HL is probably a good idea. The Pru do not have the best reputation for customer service and it will be easier dealing with HL in general.

First question then is why take the 25% tax free lump sum? For sure you do not have to take it at any particular time.
If you do not need it for anything specific it can be happily left where it is.

One problem with the cash ISA idea, is that you will have to withdraw the money from the SIPP. The 25% will be tax free, but the rest will be potentially taxable. A lot depends on your tax position/other income whether this might cause problems. It could be better to wait until you stop work, although it depends when the state pension is due as that is taxable as well.

The second issue is that over the long term, invested funds are likely to outperform cash savings.
However if you think you will need all this money in the next 5 years, then holding it in cash may well be a good idea.

Thirdly you can keep cash within the SIPP and still get a reasonable ( but not the best) interest rate on it.

Thanks for responding Albermarle. Re your questions and comments:

There's a period of time between me stopping work and my state pension retirement date when I won't have any income, so basically I need to take a small part of this - around £5k to tide me over until the state pension and db pension come into force.

I did think about taking the DB pension which will pay me a lump sum and the £200 monthly but the IFA said taking that a few months before I am 66 will reduce it's value slightly.

I will be paying tax on the DB pension and state pension when I get it so I also considered doing the Pru transfer and then taking an uncrystallised funds payment in March before the current tax year end as my current income is low and I think I would be just below the personal allowance tax threshold, so I may not pay tax on it. Does this sound a viable proposition?

I understand your point re the invested funds performance in the long term - but I'm not going to be investing a large sum to make that much difference and I may, although hopefully wont have to, use some of the funds for a car.

I see your point re the ISA - I did see that the HL Sipp pays 3.4% tax free at the moment which seems to be better than general bank and building society interest rates.

I'd be interested to hear if you have any thoughts on taking an uncrystallised funds payment in March or indeed taking the DB pension early. Many thanks.

  

Albermarle

Carefulspender1 said:

Albermarle said:

Firstly transferring your Pru pot to HL is probably a good idea. The Pru do not have the best reputation for customer service and it will be easier dealing with HL in general.

First question then is why take the 25% tax free lump sum? For sure you do not have to take it at any particular time.
If you do not need it for anything specific it can be happily left where it is.

One problem with the cash ISA idea, is that you will have to withdraw the money from the SIPP. The 25% will be tax free, but the rest will be potentially taxable. A lot depends on your tax position/other income whether this might cause problems. It could be better to wait until you stop work, although it depends when the state pension is due as that is taxable as well.

The second issue is that over the long term, invested funds are likely to outperform cash savings.
However if you think you will need all this money in the next 5 years, then holding it in cash may well be a good idea.

Thirdly you can keep cash within the SIPP and still get a reasonable ( but not the best) interest rate on it.

Thanks for responding Albermarle. Re your questions and comments:

There's a period of time between me stopping work and my state pension retirement date when I won't have any income, so basically I need to take a small part of this - around £5k to tide me over until the state pension and db pension come into force.

I did think about taking the DB pension which will pay me a lump sum and the £200 monthly but the IFA said taking that a few months before I am 66 will reduce it's value slightly. It does not really reduce its value. It reduces the monthly income, but you get it for longer. Usually you also have the option not to take the tax free lump sum in return for a higher pension.

I will be paying tax on the DB pension and state pension when I get it so I also considered doing the Pru transfer and then taking an uncrystallised funds payment in March before the current tax year end as my current income is low and I think I would be just below the personal allowance tax threshold, so I may not pay tax on it. Does this sound a viable proposition? Yes using your personal allowance to the full and not wasting it is normally a good idea.

I understand your point re the invested funds performance in the long term - but I'm not going to be investing a large sum to make that much difference and I may, although hopefully wont have to, use some of the funds for a car.

I see your point re the ISA - I did see that the HL Sipp pays 3.4% tax free at the moment which seems to be better than general bank and building society interest rates. There are better rates around but it is not that bad. An alternative is to invest the money in a Short Term money market fund on the HL platform. This will pay very close to the BoE rate and will only cost 0.1%. In theory like all investments there is some risk, but it is generally regarded as very small. 

I'd be interested to hear if you have any thoughts on taking an uncrystallised funds payment in March or indeed taking the DB pension early. Many thanks.

  

Some comments in bold above

Carefulspender1

Albermarle said:

Some comments in bold above

Thank you Albermarle - you've been very helpful - I'll take a look at the Short Term money market funds.