Lump sum to invest
Discussion
Just playing with figures
Considering taking a small lump sum out of my company pension scheme when i take early retirement shortly aged under 55
When I work the figures back to produce the same pre tax income as if I had not withdrawn a lump sum it looks like I would need to get a return in excess of 7% for any independant investment I would consider.
Obviously there are a number of considerations about future financial plans which will requiring me to sit down with an IFA but for the sake of discussion and thoughts how would you invest (fairly low risk) lets say £100k to produce a ROI in excess of 7% though would consider say 5% if there was appreciable capital gain
Considering taking a small lump sum out of my company pension scheme when i take early retirement shortly aged under 55
When I work the figures back to produce the same pre tax income as if I had not withdrawn a lump sum it looks like I would need to get a return in excess of 7% for any independant investment I would consider.
Obviously there are a number of considerations about future financial plans which will requiring me to sit down with an IFA but for the sake of discussion and thoughts how would you invest (fairly low risk) lets say £100k to produce a ROI in excess of 7% though would consider say 5% if there was appreciable capital gain
You need to consider the following points.
1. Is the company pension indexed linked. ie increase in value every year in retirement. If so you will need to revise the % return required. Each year you will need to reinvest an inflation ammount(say 2-5%) to match this pension benefit.
2. Does the pension provide a widows pension on your death. Major benefit not be overlooked.
3. Thirdly are you healthy - how long are you going to live??
4. Will you have any other income. If so will you need to draw income from this pension cash immediately, if not this could give you several years of x% return to boost your fund before requiring any withdrawals. This would be ideal.
If you are able to match these addtional company pension benefits you may find the return required is rather higher than 7% gross. You will need to be reasonably adventurous (Equity funds etc) to meet this target. If this return can meet the major benefit is on your death (and wife?) you will have retained the value of the cash sum to pass on to your beneficeries.
Even if you don't hit the % return required your fund would slowly deplete over your retirement, the fund running out in say 20 years. Given a income requirement and % investment return it would be easy for a IFA to do a spreadsheet to work out the date the money could run out!!
Obviously by taking the cash you retain control(and the risk).
Find out the FULL details of the company pension benefits, then as you say see a recommended IFA.
From my experience most people take the cash but DON'T discount the absolute security certain company pensions can provide.
1. Is the company pension indexed linked. ie increase in value every year in retirement. If so you will need to revise the % return required. Each year you will need to reinvest an inflation ammount(say 2-5%) to match this pension benefit.
2. Does the pension provide a widows pension on your death. Major benefit not be overlooked.
3. Thirdly are you healthy - how long are you going to live??
4. Will you have any other income. If so will you need to draw income from this pension cash immediately, if not this could give you several years of x% return to boost your fund before requiring any withdrawals. This would be ideal.
If you are able to match these addtional company pension benefits you may find the return required is rather higher than 7% gross. You will need to be reasonably adventurous (Equity funds etc) to meet this target. If this return can meet the major benefit is on your death (and wife?) you will have retained the value of the cash sum to pass on to your beneficeries.
Even if you don't hit the % return required your fund would slowly deplete over your retirement, the fund running out in say 20 years. Given a income requirement and % investment return it would be easy for a IFA to do a spreadsheet to work out the date the money could run out!!
Obviously by taking the cash you retain control(and the risk).
Find out the FULL details of the company pension benefits, then as you say see a recommended IFA.
From my experience most people take the cash but DON'T discount the absolute security certain company pensions can provide.
musclecarmad said:
ah, this is a very very 'how long is a piece of string' question.
do it before ret age goes up to 55 early next year
is the 7% from an annuity you will be getting? what happens on death?
have you heard of drawdown?
do you have dependants you want to leave money to if so an annuity may not be best with your current 7%
are you going to be a higher rate taxpayer in retirement?
do you want inflation proofing?
honestly, sit down with an IFA.
If it was me i'd take 5% withdrawals from an investment bond and get £5,000 tax free (bit more complex than that but i'm keeping it simple) and keep the 100k invested to hopefully grow over time whilst taking the withdrawals.
i do this all the time so if you want help pm me
Thanks Lloyd, obviously I am not going into my financial/personal detailed affairs on a public forum....are you an IFA?do it before ret age goes up to 55 early next year
is the 7% from an annuity you will be getting? what happens on death?
have you heard of drawdown?
do you have dependants you want to leave money to if so an annuity may not be best with your current 7%
are you going to be a higher rate taxpayer in retirement?
do you want inflation proofing?
honestly, sit down with an IFA.
If it was me i'd take 5% withdrawals from an investment bond and get £5,000 tax free (bit more complex than that but i'm keeping it simple) and keep the 100k invested to hopefully grow over time whilst taking the withdrawals.
i do this all the time so if you want help pm me
Regarding your final paragraph, that sounds attractive but how realistic is that? Having watched fund managers within insurance companies fail miserably in a rising market with life policy investments say over 30 years and taking into account commission that an IFA will probably charge setting up an investment bond plus the fund managers annual commission then will the fund manager perform at a consistent level to produce £5k pa income plus leaving capital intact?
Scrogger - thanks for your detailed input into this discussion.
As you say a lot of people take the cash and indeed colleagues that have retired early over the last 5 years or so have done that.
But I dont think now the situation is as clear cut and as you suggest a lot depends on crystal ball gazing.
Whilst I had done my sums a few weeks ago and was pretty certain I wished to take control over a % of my retirement income now I am not so sure.
In answer to a few of your questions
Company pension is index linked
Yes it provides a widows pension (other half 10 years younger than me)
Pretty healthy I would expect to live another 25 years say
I guess one of my concerns is that for the next 25 years I will be relying on my Company to fund the Pension scheme. Say the Company goes bust (nothing is sacred nowadays) then although the Pension fund is a separate legal entity I daresay it would still require funding. Assuming there is no income stream from the Company then there is a dependacy on the Pension scheme to generate sufficient income from investments to pay the pension obligations if it cannot then ultimately I would be dependant on the Pension Compensation fund which for me at present age would be capped at only c£26k (I think).
So one could argue £26k is guaranteed, I therefore thought to minimise the risk and spread the investments I would pull some out cash to diversify and perhaps minimise the overall risk. Of course then you are dependant on the fund manager not to loose the lump sum!!!
As you say a lot of people take the cash and indeed colleagues that have retired early over the last 5 years or so have done that.
But I dont think now the situation is as clear cut and as you suggest a lot depends on crystal ball gazing.
Whilst I had done my sums a few weeks ago and was pretty certain I wished to take control over a % of my retirement income now I am not so sure.
In answer to a few of your questions
Company pension is index linked
Yes it provides a widows pension (other half 10 years younger than me)
Pretty healthy I would expect to live another 25 years say
I guess one of my concerns is that for the next 25 years I will be relying on my Company to fund the Pension scheme. Say the Company goes bust (nothing is sacred nowadays) then although the Pension fund is a separate legal entity I daresay it would still require funding. Assuming there is no income stream from the Company then there is a dependacy on the Pension scheme to generate sufficient income from investments to pay the pension obligations if it cannot then ultimately I would be dependant on the Pension Compensation fund which for me at present age would be capped at only c£26k (I think).
So one could argue £26k is guaranteed, I therefore thought to minimise the risk and spread the investments I would pull some out cash to diversify and perhaps minimise the overall risk. Of course then you are dependant on the fund manager not to loose the lump sum!!!
Unfortunately in this situation today there is never a right or wrong way.
You would only find that out in 20 plus years from now.
I think you are correct at looking to spread your risk but you need to be able to make a fully informed decision.
The pension benefits from your company seem to be very good.
The question is as you rightly say what happens in the next 20 years.
However the same can be said of your anticipated investment return over the same time.
Do you trust the company more or your chosen fund manager??
You are certainly right to be concerned on intial charges on certain funds, they can be 5% plus on some coupled with annual management charges of up to 2%.
Have you thought that now with potentially more time on your hands to familarise yourself in some investment research. You'll soon find good managers and bad!
I look after all my investments ISA SIPPS and shares and have done for many years, it's not rocket science by any means.
Learn a little about asset allocation and your personal relationship to risk v return, this will give you more confidence it your future actions. Have a look a www.iii.co.uk which provides details on a whole host of investments fund - low, medium and high risk. Where do you see yourself. You'll also see that you can reduce intial charges down to 1% on most funds some even lower. This will certainly help to clarify your own risk profile.
I hope this helps, but I feel you need more information to be able to justify what action you take. Only hindsight in 20 years will determine which route was correct. Good luck investigating your options.
You would only find that out in 20 plus years from now.
I think you are correct at looking to spread your risk but you need to be able to make a fully informed decision.
The pension benefits from your company seem to be very good.
The question is as you rightly say what happens in the next 20 years.
However the same can be said of your anticipated investment return over the same time.
Do you trust the company more or your chosen fund manager??
You are certainly right to be concerned on intial charges on certain funds, they can be 5% plus on some coupled with annual management charges of up to 2%.
Have you thought that now with potentially more time on your hands to familarise yourself in some investment research. You'll soon find good managers and bad!
I look after all my investments ISA SIPPS and shares and have done for many years, it's not rocket science by any means.
Learn a little about asset allocation and your personal relationship to risk v return, this will give you more confidence it your future actions. Have a look a www.iii.co.uk which provides details on a whole host of investments fund - low, medium and high risk. Where do you see yourself. You'll also see that you can reduce intial charges down to 1% on most funds some even lower. This will certainly help to clarify your own risk profile.
I hope this helps, but I feel you need more information to be able to justify what action you take. Only hindsight in 20 years will determine which route was correct. Good luck investigating your options.
Edited by Scrogger on Saturday 7th November 19:38
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