Our experts advise a reader on how best to capitalise on a redundancy windfall
For Brian Lumby being made redundant from his job as technical manager at a pharmaceutical company was an opportunity.
The 57-year-old of Swindon, in Wiltshire, was given what he describes as an excellent payoff, and is making plans for how to invest the money for a comfortable retirement.
After his redundancy, Brian has a total savings of £70,000 in the bank, along with a pension pot worth about £310,000, which is growing by about £15,000 a year. When he returns to work he expects to earn an annual salary of about £70,000 but, in the meantime, he’s happy to continue as a freelance contractor for a few years.
He has two children, and his partner also has two, but all are grown up — aged between 21 and 32 — and none is financially dependent on them.
Brian would like some advice on how to invest his £70,000 cash pot. He would ideally like to keep ready access to £20,000 of his savings, but is happy to invest £50,000 in long-term schemes.
He is not keen to get involved in stocks and shares, and would prefer to avoid property investments because he already owns a family home with his partner in Oldham and has no desire to buy anything else.
“At 57 I expect to be working for 15 years yet, but I am looking forward to life out of the rat race,” he says. “I would just like to know how best to invest it and I’d be interested to know what you think.”
The experts’ advice
Katharine Lindley, client director and chartered financial planner
at EQ Investors
“Brian’s aim of focusing on long-term savings to complement his pension makes sense. The state pension will contribute to his retirement pot, so £20,000 is a sensible amount to keep for ready access. With inflation higher than interest rates, cash savers will lose money in real terms.
“Brian should shop around for competitive rates. Keep an eye out for challenger banks and even current accounts that often beat cash Isa rates. The personalised savings allowance means that Brian can use his Isa allowance for long-term investments. We wouldn’t recommend buying individual stocks and shares.
“However, Brian might benefit from a managed portfolio service. This would take into account his risk appetite and result in a diversified portfolio with a mix of asset classes. Brian shouldn’t forget the benefits of splitting assets with his partner. By combining allowances, they could hold the £50,000 within Isa wrappers in two years.”
Sian Thomas, adviser at Hargreaves Lansdown, the financial services company
“Brian’s state pension will be paid from age 66, in nine years’ time, ahead of age 72 when he plans to retire. At £159.55 a week, the state pension will provide a good starting income to build on in retirement. Assuming Brian’s pension pot continues to grow at 5 per cent a year, the value will be about £645,000 and capable of producing a sustainable income of about £15,500 a year allowing for inflation.
“The £20,000 Brian wants to keep liquid should be held in an immediate access cash Isa. The interest will be tax-free and he can shelter £20,000 in an Isa in this tax year. With the remaining £50,000 he should maximise the higher-rate tax relief available on his pension. For example, assuming he earns £70,000 in this tax year, if he were to add £20,000 to his pension, he would receive a boost of £5,000 tax relief, making a total of £25,000. Brian should also be able to claim a further £5,000 in tax relief through the self-assessment system in his annual tax return.
“When he draws his pension, Brian can take 25 per cent of the value tax-free and is going to pay only 20 per cent tax on the income, so he will get higher-rate relief on the contributions compared with the tax rate paid on the withdrawals. Brian is 57, so he can draw all or part of his pension at any time, although the longer he leaves it invested the greater the chances for it to grow. This would leave £35,000 (after adding back in the tax relief), which should be invested in managed funds. Brian is not keen on getting involved in stocks and shares, so managed funds run by professional fund managers mean he doesn’t have to make the day-to-day investment decisions, but will benefit from the greater growth potential than cash.”
Dennis Hall, chief executive of Yellowtail financial planning
“A common problem for many investors is that they adopt a short time horizon when looking at investments instead of the actual period they are likely to remain invested.
“A possible life expectancy of about 25 years increases the risk of ‘safer’ investments losing value because of inflation, and reduces the risk attached to more volatile investments, such as shares.
“It doesn’t need to be complicated or expensive. I would recommend one of the Life Strategy funds from Vanguard — the 60% Equity fund is a good balance between risk and reward. I would invest in this fund and forget it.
“Launched in the UK in June 2011 the average annual return after charges has been just over 9 per cent a year.
“Brian could consider something less volatile, but the interest rate outlook for savers remains bleak. Long-term investors should look at ‘real assets’ not cash products.”
“You can’t beat a bit of expertise when you are not certain yourself. It’s interesting that they haven’t thrown anything at me that I haven’t already, at least partly, considered.
“What has helped here is the way they have exposed some detail around the possibilities; it’s given me plenty to think about.
“All very sensible of course. George Best wouldn’t have approved. What was it? ‘I spent half
of my money on wine, women and song, and squandered the rest.’ ”