Flexible Retirement

grumpyoldman_3

I plan to take my company pension,but to continue to work for 3/4 days a week.I expect to receive a lump sum of around £70k and a yearly pension of £10k.I intend to work for another 3 or 4 years.by which time I will be 64ish,At this time my pension will decrease by £1.5k a year.I have been advised that I may contribute to a new company pension scheme.(A point to note is that I have to close my current pension scheme in order to be eligible for the flexible retirement scheme).
I have used this year isa allowance for both myself and my wife.
Any advice on how to invest the lump sum and to reduce any tax liability would be appreciated.

exil

I must admit this is the sort of thing I hope my current employers will offer me in a few years! I much prefer the idea of going down to 3 days a week rather than either working full time till I drop dead, or suddenly stopping work.

For tax efficiency I would suggest - a personal pension. You should be able to invest up to 100% of salary tax free (including what you're already contributing to the new scheme). However the normal caveats apply - you can't get all the money out again (25% is the limit) except in the form of a pension.

However, seek proper advice from an IFA (which I'm not, so I've no axe to grind!)

EdInvestor

grumpyoldman wrote: »

Any advice on how to invest the lump sum and to reduce any tax liability would be appreciated.

NS&I Index linked certificates are very useful - up to 30k per person in two issues, payable tax-free.Obviously you will fund the two S&S ISAs every year - 14.4k from this year on, so by 4 or 5 years you should have all the money protected.

You don't seem likely to incur any pension-related tax issues - how big is your state pension?

The pensioners tax allowance goes up to 10k in 2010: it may be worth funding a pension for your wife if she has unused allowance after state and other pensions are taken into account.That might be a better use for spare money than additional taxable pension for you if she can get hers tax free..

grumpyoldman_3

My state pension will be about £6.5k.My wife has only a basic state pension,
Thanks for all the advice.

jamesd

Since you each have a personal allowance that's going to be about 10,000 a year soon for over 65s it makes sense for the first 3600 (after tax relief) of pension contributions to be for a pension for your wife, not you. That way the pension will be tax free income for her, assuming she's not getting interest or other earnings that take her over her personal allowance. So she gets tax relief on the contributions but no tax on the income, one of the few free gifts from HMRC.

Say you put 30,000 into the NS&I inflation-linked bonds, one for three years, one for five, leaving 40,000 still to deal with.

What you can do is exploit your capital gains tax allowances. If you're willing to take some risk that it will continue to do as well as it has you could put the remaining 40,000 of the money into the BlackRock UK Absolute Alpha fund and. It doesn't pay interest but instead grew its capital value by 9-10% over the last year.

So, you can put money in that then each year sell 14,400 worth to put into the ISAs of you and your wife. You'd be liable for capital gains tax on profits but they would be less than your capital gains tax allowance so you'd have no tax to pay. By the time the money in the BlackRock fund runs out the first NS&I inflation-linked bond will be maturing and you can use that to fund the next year of the move into the ISA wrapper. The final NS&I bond can be put into the ISAs when it matures.

For lower risk to your capital and lower potential returns you could instead put 60,000 into the NS&I bonds and 10,000 into the fund, or any other proportion.

The things I've mentioned here are risk-based investments: the BlackRock fund could do less well or even lose money while the NS&I bonds could lose you money compared to a bank savings account or fixed rate deal if inflation is at a low level. There's a very low chance of loss of starting capital in the NS&I bond, some in the BlackRock fund.

margaretclare

Anyone can invest in a personal pension up to age 75, whether he/she is officially 'retired' or not.

Investing in a personal pension means that basic rate tax is added i.e. if you put in 80p the taxman adds 20p, thereby making £1 to be invested in the fund of your choice. Or if you put in £80, taxman adds £20, £100 to be invested.

There are many, many other funds available in addition to the ones Jamesd quotes above. You pays your money and you takes your choice. I agree with what Ed says above about your wife.

HTH

Margaret

EdInvestor

jamesd wrote: »

What you can do is exploit your capital gains tax allowances. If you're willing to take some risk that it will continue to do as well as it has you could put the remaining 40,000 of the money into the BlackRock UK Absolute Alpha fund and. It doesn't pay interest but instead grew its capital value by 9-10% over the last year.

I can't agree with this advice. To suggest that a retired person puts more than half his capital in one small hedge fund which provided no dividend income (the OP doesn't have tax issues) in the current market is irresponsible IMHO.The fund might be a useful component in a much larger portfolio which is designed to match the OP's level of risk, but one can think of many funds that could be chosen ahead of it on the usualy 5 year view..

jamesd

grumpyoldman, please say more about your circumstances if you're interested in a more general review of your options. Knowing your total assets (all savings and investments, pensions and such) and how much investment risk you're used to taking and willing to take would be helfpul so we can look into all the ways to improve your position. What does your pension forecast say for total pension income after you fully retire, work plus state basic and additional pension?

How happy or unhappy are you to change capital that you can spend in a large chunk for a regular pension income that you cant get as a lump sum? Any thoughts on how much of a lump sum you want to keep around? ISAs are best for the lump sum you want to keep around, pensions for changing capital to regular income.

EdInvestor, the brief from grumpyoldman was "Any advice on how to invest the lump sum and to reduce any tax liability would be appreciated", with pension income expected to be 10k plus earnings from the job for the term being considered. Grumpyoldman is most certainly a tax payer with taxes worth avoiding. There is no five year view here - the term for investing the money outside the ISA and possible pension is only until the money can be moved into those tax wrappers and for the last batch of 14,400 that's just four years away if no pension contributions are made. Though that last batch of 14,400 should probably all be put into a pension for the wife in chunks of 3,600 a year after tax relief, bit under 3,000 a year before, leaving us with just a three year timeline after allowing a bit for more pension contributions for grumpyoldman.

One of the most effective ways there is outside pensions and ISAs for reducing tax is to switch from taxable interest to tax free capital growth. That's what the BlackRock UK Absolute Alpha fund does, while delivering some of the lowest up and down variations in value that can be found.

Certainly a range of investments would be a better idea than any single type. The gilts you mentioned offer just 1-2% income a year, while this fund assuming 4% inflation has so far delivered 5-6% after inflation. Losing 2/3 of the available after inflation growth is a very large penalty for using a lot of gilts.

Instead of simply disagreeing, how about suggesting an alternative mixture of investment options for the money that can't go into the ISAs or pensions yet and comparing the possible after inflation returns, volatility and risk of capital loss of the options you've discussed with those I've discussed?

Obvious ones for the long term that we might consider, like Invesco Perpetual Income, don't look like a great prospect for the next year or so, with a strong chance of them losing another 10% of value this year. Better to use that inside the ISAs for the long term.

Within the ISAs stability at minimal cost can be achieved through things like preference shares (over 8% available from NatWest, over 7% from many others) and directly held corporate bonds (over 8% available from HSBCs, over 7% available from many others). Numbers in this paragraph are before inflation.

If you think that BlackRock UK Absolute Alpha is small you need a better source of information. As of Feb around 600 million was invested in it (though Hargreaves Lansdown still says the way out of date 78 million). You might consider giving 0207 136 9233 PIN 356941 a call and listening to the March intermediary update Q&A, recording available for 14 days after the first Tuesday of each month. At that point around 60% of the money was invested in matched companies - one looking likely to go up, the other looking likely to go down, so shorted.