Unexpectedly retired and need to sort my finances out!

[UnexpectedlyRetired]

Hi everyone!

As per the title, I have had a large change in my financial situation and feel somewhat at sea.

I'm 59, and had been planning to retire at around 64. A few weeks ago I was made redundant, then two days later my mum died, and left me some money. Following the redundancy I had pretty much decided to retire early, and the inheritance made this an easy decision. But, I need to figure out how best to manage the money. I've been through the PensionWise online questionnaire, but that didn't answer all that I want to know, as some of my money is not in pensions. I'm talking to my mum's financial advisor soon, as I'm considering reinvesting her inheritance with him, but I don't know if he will be the right person to give me an overall picture including the pensions.

I'm married, and my husband is organising his own pension income.

I have/will have:
£9,300 a year in defined benefit pension (I want to take the maximum yearly, with no lump sum)
A pot of around £200k in defined contribution pension
£270k inheritance

Until the state pension kicks in I want an extra £14k gross annual income on top of the £9.3k (I can lower this substantially once I get state pension) and I'm not sure how best to do this.

a) take it out of my pension yearly as phased drawdown (I will have to look into any charges for this)

b) use Uncrystallised Funds Pension Lump Sum.

c) take the income out of the inheritance. Obviously none of it would be a tax-free some, but on the other hand I expect to be paying tax on any growth on this money.

I suppose before the IHT changes on pension funds it would have been advantageous to leave money in my pension rather than other funds, to pass on to my children if I die, but that is no longer the case.

I'm not sure of the benefits/disadvantages of a) and b), as they look pretty similar on the surface.

What would you do?

I'm sorry for your loss.

Once your state pension kicks in, will you need an income from the DC pension at all? If not, then I would prioritise that for your spending as it's better not to die with a large amount in there.

The key difference between drawdown and UFPLS is that, with drawdown, you crystallise your pension and take the 25% tax free upfront, whereas with UFPLS you only crystallise each portion of the money as you take it, so you get 25% tax free on each chunk. If you could do with a large lump sum now then you might want to take the whole 25% now and draw down the rest. If not, then it can work out better to use UFPLS as it allows the pot to keep growing uncrystallised, meaning that you can take more tax free overall.

You might want to think about whether it's worth putting some of the inheritance into the pension first (once you start drawing anything apart from the tax free lump sum there are limits on what you can put in)- if you have unused annual allowance you could get the income tax back and then take it out again 25% tax free. You can also gradually move the inheritance into ISAs.

You really need a financial planner who is independent, not someone who just wants to persuade you to put your funds with them.

I assume your £9.3k DB is reduced for taking it early. If you are keen to maximise guaranteed income (which I assume you are given opting for zero tax free lump sum) I’d find out how much more you’d get if you took it later. You could then compare that to using the other funds to bridge the gap.

You could also consider a fixed term annuity for the guaranteed income you want to SPA.

I know you said your husband has his own pension income, but you have more money than you need for what you have set out above. Have the two of you talked about what you want to do in retirement? And what happens during the time (if that is what will happen) when you are retired and he isn’t? Will you pick up more house stuff or will that lead to resentment? Whilst you may each be able to fund your own retirements, have you talked about the big joint expenses and plans? Travel or helping family or whatever? It sounds as though you’ve made a quite sudden unanticipated transition from work to retirement and it’s really important to think about the non financial bits too

guiide (not a typo it has two of the letter i ) is quite good for suggesting how to use various fund sources and will also include calculations for tax.

This is not the place to ask for detailed financial advice. Please get advice from a financial adviser.

Your 270k inheritance will produce approximately 10k in interest at 4%,most investments would perform better. ( You will be taxed on a small amount) You have 9k and need an extra 5k so you don't need all the interest on your inheritance so half the annual interest Can be reinvested and continue to grow without you touching your capital. Assuming you already have emergency savings the other 5k in interest could be put back into investment as I already said or it could be separated as your new car holiday fund. It seems you are in good solid financial position so take your time getting advice but if you get money before 5th April make sure to max out this year's ISA

She wants an extra £14k not £5k

The first roughly £12.5k will be free of income. Tax plus if you dont take the 25% lump sum, or only part of it, 25% of what you take is tax free. So you could take say £4k your DC pension, £1k would not count towards your tax free allowance so you would get £13.3k with no income tax to pay. Then top up from your inheritance by £10k a year. That way you won’t pay income tax

Max out your ISA allowance from your inheritance.

Alternatively, if you want a guarantee income, look at annuities, they are very high at the moment and you could just a flat one which would decline in real terms until your state pension kicks in. You could buy this with your pension or with your inheritance

I am not a financial advisor

Thanks all. I'm obviously not looking for definitive answers here, just for some thoughts, and some things to discuss with financial advisers. (If I look for an additional one, what am I looking for? IFA? Chartered Financial Planner? Wealth planner?)

@LizardCase, why should I not die with lots in my DC pension? Is it better to die with lots in investments? I thought either way, they would go to my beneficiaries/heirs, after tax. And thanks for the comments on UFPLS.

DC pension - I've maxed this out already this tax year with my redundancy money. I'd thought once I started taking pension money I couldn't add more, but now I'm thinking I was wrong about that. I wouldn't get tax relief but would I get a tax free element on withdrawal?

@PosiePerkinPootleFlump re DB pension, I put it in a spreadsheet and the totals seem to even out when I'm about 90, so I'd rather just start taking it now and get a lower income sooner. If I die before DH half goes to him and if we both die it disappears, so I prefer to get it now.

ISAs, yes will do. No spare cash to put the maximum in this year (inheritance is pending) but will do in future.

Fixed-term annuity, didn't know that was a thing, so thanks @PosiePerkinPootleFlump

@BTsrule in your scenario I would pay tax on the 10k from the inheritance, would I not?

DH by the way retired last summer. We made a budget then, with what we would like to do, and it includes lots of travel. Housework, haha. He has done nearly all the cleaning since he retired and sadly I now have to pitch in too lol.

Yes, even with all our plans I now have more money than I need and I do also want to help the kids financially, but didn't want to put too many complications in this post. I don't have much at all in emergency savings as we just gave one daughter a house deposit - everything has happened in a very short time.

Will look at guiide, thanks.

No you don’t pay tax on the inheritance - assuming this is the sum total of your mum’s estate, it’s under the IHT threshold.

you will pay tax on the interest you earn on the inheritance but the first £1k of interest payments is tax free across all your savings accounts that pay interest. . On £200k you might get 4% so £8k before tax in interest payments and you would be taxed at 20% of £7k so £1.4k

Also, your children will get £1m free of IHT as the IHT allowance of whoever of you or your DH who dies first can be transferred to the surviving spouse. The DB scheme will fall away on the death of the surviving spouse so won’t count in the IHT calculation. But the DC pension will as will the house value and any other assets.

If you need a guaranteed fixed income for a set amount of time as @PosiePerkinPootleFlump mentioned, a fixed term annuity could be a possibility.
I just wanted to add that annuities are not just limited to pension pots - they can be bought with an inheritance outside of a pension.

A non-pension annuity has some key differences:

• Tax Treatment: Because its using post-tax money (the inheritance), a portion of each annuity payment is treated as a return of the original capital, which is tax-free. Only the interest/growth element is subject to income tax.
• Flexibility: Unlike pension annuities, these can be purchased at any age.
• Fixed-Term Options: You can structure them to pay a set income for a specific number of years (and possibly opt for the set amount to increase at a set rate annually to mitigate inflation effects), and provide a guaranteed maturity value at the end of the term.

It is a specialist area and it's highly recommended to consult a financial adviser to help determine if a non-pension annuity is the most tax-efficient use of your inheritance compared to other options.

@BTsrule no IHT. The total estate is actually over the one-person limit, but below the two-people limit and we get my dad's allowance. I didn't know the first 1k of interest is tax-free, I've never had that much potential interest before!

IHT is however a concern for my and DH's estate, now that pensions will get taxed on death. House + savings would be under £1m, but adding in pensions we'd be well over. I'm not so worried about the tax they will pay as how they could find maybe hundreds of thousands to pay it before getting probate. That's a whole other issue though.

@NoAdsPlease I've been looking at fixed-term annuities, and got quotes of around £64k for a flat rate for the 7 years I need, so that is certainly a tempting option. It does seem though that they can vary by quite a lot depending on exactly when you buy your annuity, affected presumably by Iraq and many other things...

Dh is facing fairly similar decisions at the moment, no defined benefit though, he’s definitely going to drawdown £12,500 each year as its tax free then use his inheritance to enhance it as needed (I’m still working so don’t need too much)

Annuities are closely linked to gilt yields (UK government bond yields). When gilt yields rise, annuity providers can typically offer higher income rates as providers buy these bonds to fund the income payments.

Gilt yields have been rising due to various world events and the UK's own economic worries - investors demand a higher rate for the risk of lending to the UK government, particularly if the risk of inflation is looming. They are at a 15 year high at present.

Another option could be to buy gilts yourself for the time frame, (or build a bond ladder of investments, maturing in sequence over a number of years). They are guaranteed by the UK government and they have never defaulted in modern history. Many retirees use gilts as a safe and predictable income stream whilst protecting capital.

The bonds pay a dividend (a coupon) every six months, taxed as income at your nominal tax rate. Current rates for 10 year gilts are around 4.6%. At the end of the term the bond matures and the investment is returned. Bonds can be bought and sold on the secondary market before maturity. The dividend coupon and the redemption value is fixed at issue, so you will know exactly your return, unlike stocks investments. (There are also index linked gilts but these need a little more investigation so you are clear on the pros and cons).

It's unlikely that an IFA would recommend these as they offer very limited opportunities for an adviser to make a profit from management of the investment - once set up they basically run themselves until maturity.

Gilts can be bought and sold on some investment platforms, with a small commission for dealing - eg: AJ Bell charge £5 a trade.

Hargreaves Lansdown offer a platform that's free to hold gilts on their 'Fund and Share' account (Their commission for purchase of gilts is higher than some others - if you're only making one purchase this might still be a good option).

They give a good guide to gilts here:

https://www.hl.co.uk/partners/search/gilts?partner=1&theSource=PCGDG&gad_source=1&gad_campaignid=70603117&gbraid=0AAAAADwZS08dgnC9f3iA6a_-V2Pn_DmPy&gclid=CjwKCAjw1N7NBhAoEiwAcPchp9NeubjM4COc1TQXLPY7hObUY6O6V4LQQKiTomco7N6yfrM-LYIq-hoCMLwQAvD_BwE

https://www.ajbell.co.uk/investment/bonds/gilts/prices

Sorry to hear of your loss and you have been through a lot very rapidly. Slow down and take your time before making any decisions.

I would say educate yourself. You have free time and there's lots of information on YouTube. Financial advisors are very expensive and will take their cut of your money for offering advice and will get a percentage going forward too. They make their money by taking yours and I personally don't think they offer value for money at all in this day of online access to self invested pensions, free trading apps and a wealth of free financial support channels and forums. Start with Rebel Finance videos and take your time before committing to anything. There is no rush and it's important to understand your choices rather than outsourcing to someone else who benefits from selling services to you.

Don't forget, you can put £20k a year into Isa's as can your husband to shelter it from tax. I agree you need an IFA to explain the options, but choose wisely and compare their fee structures. Ensure they are genuinely independent, so they can offer products across the whole market.

Just a quick correction to my post - Hargreaves Lansdown is now charging a platform fee for holding gilts, as of 1st March.

iweb has a full range of gilts, and it charges a one off £5 dealing fee per trade but no platform charges for holding gilts.

why should I not die with lots in my DC pension? Is it better to die with lots in investments? I thought either way, they would go to my beneficiaries/heirs, after tax. And thanks for the comments on UFPLS.

It's less of an issue as your estate probably won't be subject to IHT, but if you die over the age of 75 your beneficiaries will need to pay income tax at their marginal rate to take the money out of the pension. It can work out more tax efficient for you to prioritise spending from your pension and leave your beneficiaries more outside the pension (for example, if you are basic rate taxpayer and they are higher rate).

DC pension - I've maxed this out already this tax year with my redundancy money. I'd thought once I started taking pension money I couldn't add more, but now I'm thinking I was wrong about that. I wouldn't get tax relief but would I get a tax free element on withdrawal?

You can take the tax free lump sum and still continue to add as normal. Once you take any taxable income though you are limited to a max £10k a year annual allowance.

Would add to @NoAdsPlease post above that with all but very short term gilts you really need to factor in inflation. Yes, you will know your return but it's very hard to know what the real terms value of that return will be 10 years down the line, so while they protect capital in nominal terms they may not in real terms. Not saying don't buy gilts, but NB they are riskier than they look.