Retirement lump sum

[damekindness]

I’m in the lucky position to be retiring (age 65) at the end of this year. I’ve no debts and mortgage paid off. I’ve got a moderate DB pension of 26K a year. I have a lump sum and redundancy payment of circa £150K. I want to be able to draw down 1K a month to top up my pension till I get the state pension in 2 years. I’d vaguely like to eventually use some of the lump sum to renovate/tidy up the house/put in a downstairs loo etc

I have no clue about managing finances - I’ve only ever used a current account and a small savings account. I’ve no idea what to do or where the best place is to put the money.

what would you do in this situation? What do I do?

Personally i wouldnt bother paying for a financial advisor. I've put my lump sum in premium bonds, if you have the full 50k then more often than not you get a monthly prize which is tax free and goes straight into your current account. (I got £200 this month). NS&I also have monthly income bonds, where the interest is paid out monthly into your current account. (Both of these are simple to organise online). Of course take advantage of cash isa allowance of 20k first. There are some that allow up to 4 withdrawals a year so if you need lump sums for house maintenance then you can access easily without a penalty. You may find that you don't need the extra 1k a month, I cover everything with less than 20k per annum from pensions and interest........ unless you plan on lots of holidays. Enjoy your retirement💐

You’re 65. You’ve got a good chance of living to 95. That’s 30 years of stock market ups and downs. Some of it should be in cash but some should be in stocks & shares. Keep enough in cash so that you aren’t forced to sell the shares when the markets are down. For the second time this week I recommend the book “How to Fund the Life You Want” by Powell & Hollow. Available in Audible too. Explains this sort of stuff really well. Including where to get help, how to go about getting an advisor etc.

And the amount you is protected in each firm has gone up from £85K to 120K so not such a need to spread it round different places.

You’re 65. You’ve got a good chance of living to 95.

Might live to 95 but won't be spending a lot of money by that age, unless on care costs.

Assuming OP is in good health, they're looking at 10-15 years of living the retirement high life of holidays etc before it tails off and they only have day to day expenses to cover from an annual income of over £35k.

As the £150k isn't in a pension, you don't need to drawdown. That term refers to taking money from your pension pot (SIPP or DC pension, not DB pension)

You can put that £150k where you like and take it as you like - it is free of tax at the moment. If you make sure you put £20k of it into an ISA every year, the growth, interest or dividends from the portion in the ISA will be tax free too.

Where you put that money depends on when you want to use it. If you can consider a 5-10 year horizon, put it in stocks and shares as that will likely deliver the greatest growth. You can choose to put a portion of it in S&S and not touch it for 5-10 years. (Use you ISA allowance for this each year)

The rest of the money that you don't invest can you put in a cash savings account, but you won't get a huge amount of money from it. Again, you can use your ISA allowance and find the best interest rate for you. Choose easy access or a fixed term depending on when you want to use the money.

Alternatively, you might want to put a chunk in Premium Bonds - don't expect to get much return (less than a cash savings account) but there's always the miniscule possibility you'll win a million.

You can get pensions guidance from pensionwise.gov.uk,

No! Really not worth the cost. We thought this too and sacked off our FA shortly after getting them on board. Look up Rebel Finance School online and do the course on there. It will tell you everything you need to know OP.

Im guessing your £150k is tax free (25%). If DB just invest and take out what you require each month.

At 95 you might need help around the house to clean or garden, as well as carers. Your heating bill may be higher. You may need to take taxis to appointments. It all adds up. And that’s without inflation.

What's the commutation rate? How much annual pension are you giving up for the bigger lump sum? Have you done the sums??

Our financial advisor is most definitely worth the cost.

@herbetta I’ve used the online calculation tool that my pension provides plus a quote. The maximum I can take is £150K but in view of a fairly generous redundancy package I intend taking £100K - the £50K difference only adds around £3K to my yearly pension and as a pp said will be taxe

The sum is tax free as it’s £100K DB plus redundancy (which will be around £50K after tax) It’s the where to optimally/safely invest the sum that I’m clueless about

And that is exactly where a financial advisor will help.

Yes, because until you can get it all into tax-free investments, you will be paying tax on any savings income above 1k.

I have recently done similar to you, and I agree though I have learnt a lot and taken some advice,it's still a bit on an individual minefield!

As others have said, get 20k into Cash ISA in this year before the tax year end and 20k a week or so later. Rates are not bad at the mo. I have fixed some for 5 years and some for shorter periods - 1.5 to 2.5 years. I'm also a fan of Premium Bonds due to their tax-free nature and the ease of putting money in/out of them.

That's another 50k sheltered in the interim. With 60k left @ 4%+ you'll have an annual tax bill of circa £1400+ on the remaining 60k. I'd do as much as possible to avoid that ie: do the renovations sooner, buy a car if you need one, go on a round-the-world cruise, gift money etc.

I was made redundant and took £200k from my DB which was tax free and now in receipt of my pension. I also was due to get £150k(ish) as a redundancy payment but would be paying a lot of tax, my advisor advised me to take £30k tax free and then invest the rest into my DC pension (using carry back/forward) and not pay tax on £120k. That’s what I have done and will now draw down as and when, which I will then pay tax on but it is still much less than I would have been paying.

https://www.citizensadvice.org.uk/about-us/information/pension-wise/

Free guidance/advice for anyone over 50.

OP will be paying tax on any interest over savings limit, if we assume interest rate of 4% gain is approx £2400 a year, she’ll pay tax on £1400 not a bill of £1400 so approx £350.

Have a look at an investment portfolio with Vanguard. They are huge. V reputable and easy to understand. Obviously there are risks but you can set your risk profile quite low if you are nervous about investing. Highly recommended. You can take a monthly or quarterly return. It’s very straightforward. You don’t really need an FA. Just do some research yourself. Unless you are too nervous about it. In which case make sure they are an Independent one.

You clearly didn't learn as much as you think you did to come up with a tax bill that is 4 times what it actually would be on the remaining 60K

If you are letting the tax tail wag the dog, then you should put the money into investments that produce capital gains instead of interest.

Capital gains tax rates are lower and if you never cash your investments in, you don’t pay it.

Worth noting that if you have no or low income less than £17 570 iirc your tax free savings limit increases by £5k

Obviously the OP has more than this but not very widely known so thought I’d mention incase applicable to other posters

FGS, that was clearly a (one letter) typo where it should have read 'on' £1400+ and not 'of' £1400+

Seriously you need a financial and pensions adviser- worth paying for - not netmums nor any other non professional and non relevant forum. Well done though!