Pension: how to invest lump sum drawdown

[Ziferblat]

DH is coming up to 55 just before the next Budget. There is talk of scrapping the 25% tax free pension withdrawal so he feels he should take the money tax free while we can.

I should caveat this with saying we are in a really fortunate position compared to 90% of the country.
He has had a high paying job for years so it will be about 200k. We have paid off the mortgage on our house and never upsized.

What would you do with the money?

Options are:

• Get a BTL (I think it’s a bad idea under the current tax regime and we have got two modest ones by default but are not mercenary enough to run them at market rents as that seems criminal!)
• Upsize property (somewhere nearby which would mean keeping DC in current schools)
• Pay school fees or put it away for uni up front. School is by far our biggest expense but I would sell up and live in a tent before pulling them out as they have thrived and we live in an appalling area for state secondaries. VAT has made school fees a massive financial and mental burden.
• Use up our ISA limits for once including the DCs and open SIPPs for DC? We won’t ever get to see their enjoyment of this though or be able to use it should we need it
• Pour it into stocks and shares? Stock market has had by far the biggest returns. A general account will also be taxable for dividends and cash outs

I’m worried that DH could be tempted to squander it on a car (we don’t even have off street parking and have a perfectly reasonable car already!) or crypto!

I will encourage him to treat himself a bit but it would is also family money as I have sacrificed much of my career to take the mental load DC related stuff…

What would you do?

open an interactive investor account and then open stocks and shares ISAs within it for both of you = £40k. If you want low risk invest all 40k in a money market fund - currently yielding around 4.8%. Which would be tax free in the isa wrapper. Do the same on 5th April next year.

Do the same for the children. Although they should have their ISAs in a world tracker ad they have time for the ups and downs of the stock market.

use the remainder as you wish.

Be prepared for the lump sum to take ages. We initiated ours last October, before the budget, and it's still not been paid: I keep chasing and being told its nearly finalised. However, we're nearly 70. I agree that ISAs for the adults and SIPPs for the DC in a good broadly based tracker fund. You can invest £3,600 per child annually. We're giving about half of our lump sum to our DC26 to buy property while we can realistically expect one of us to survive the next seven years.

Ok great, I’m glad you know about it! I hope it works out for you both and you find a solution!

Could explain the difference between a financial planner and an IFA? You know the qualifications, the different products that would be available to a Financial Planner and not an IFA?

Why would “most” IFAs be clueless?

You’re talking nonsense……..

Is that 4% figure correct? after all, whats the "market" the SP 500 or the FTSE? etc etc...

What is the comparison?

What is the higher rate taxpayer loss of pension efficiency? It is the higher rate taxpayers that benefit most from saving into a pension.

The same rumours were around for the last budget when millions was taken out of pensions.

It will need legislation to change the tax free amount and could not be done overnight.

Anyway, the changes she’s already making to pensions will increase taxes on 20% of pension savers which is already having a massive impact on people willing to put money away for retirement.

“was staggered to discover that just 4% of fund managers outperform the market. That means if you’re invested in anything other than a passive all cap global index fund, you’re only 4% more likely to be gaining more than these funds!”

Staggered eh? It’s common knowledge. That’s why tracker funds are popular.

You may even find that the clairvoyant 4% only outperform the market sometimes. They don’t boast so loudly about the times the market outperforms them.

The comparison is the relevant Investment Association sector (UK, global, Europe ex UK etc). The fund factsheet will tell you which sector so that you can make fair comparisons.

Having said that, I don't think that 4% figure is right. How fund managers have succeeded in beating the market again | AJ Bell says that across 10 years 31% of managed funds outperform UK, 17% global, 15% US (which is what you'd expect given how much everything is dominated by the tech giants)- and first half of this year managed funds have done pretty well and beaten trackers for Japan and global, due to managers' ability to respond to Trump's nonsense. I generally prefer passive because those figures still aren't great and you'd be paying extra for something probably worse, but it's not as bad as 4%.

They are not going to scrap the 25% lump sum. Indeed, I’ve not even heard any serious talk about it.

Leave it where it is rather than piss money up the wall.

Where do you hear about the 25% tax-free cash being scrapped?

Social media propaganda, probably.

Yes Same as "Reeves will hike taxes by 50 billion to fill the "black hole"

Yet many economists put it between 10 and 20 billion, ONE think tank says 50 billion - 41bn plus her desired 9 billion head room.

I think you should not take the money out. Your husband could continue working for another 10 years. £200k invested in a pension for 10 years will increase in value. Also if he is currently a high tax individual he may drop a tax band when he does stop working. But a chat with a good financial advisor would probably be wise before you make any decisions

New contributions will attract 25% TFC but the original 75% won’t. This could grow significantly and could represent a big loss by crystallising now.

Yes, you should use a financial advisor, they're worth every penny.

And the clairvoyant 4% almost invariably take up more risky investment opportunites, so just as the upside is higher the downside is lower. An old friend is an experienced and successful investment manager who takes virtually no risks with his own money but relies on having invested consistently over the years - and has benefited hugely from compound interest.

That loss is real.

The reasons for taking money out are not real. Something about a rumour: “There is talk!”

Buy a motor or a a cheap holiday home in somewhere like Spain.

Buy a motor or a a cheap holiday home in somewhere like Spain.

Don’t spend it if you didn’t have plans to do so. Just save it and factor it into your long term plans.

I wouldn’t recommend crystallisation unless you needed the cash.

Lots of sensible advice. Don’t believe the rumours but also don’t let the tax and what might or might not happen run your life. A registered financial adviser will have sat exams and be regulated but you can add a tax lawyer if tax specialist accountant if you want to be super informed. There will be many many budgets, many more chancellors, and many tax changes over your lifetime …. Taking that lump sum and not spending will lead to potential income tax, the value of it will diminish away from tax free investments in a pension. Maybe just take isa limit for this year and next and buy small premium bond holdings for children as their future Uni extras fund. don’t remove more than you need. Without knowing way more about your pensions and savings no one can really advise. You will likely need a pensionable income of £45000 pa after tax to pay bills, run a car etc. But to enjoy holidays, pay for help and care when older significantly more. £200k would cover care home fees for about 18 months.