If I take a lump sum from my pension, where can I invest £35,000 of it?

admin
25 August 2015

Q

My wife plans to take early retirement in October, reducing her hours down to part-time until March 2016. I am 62 and earn £25,000 a year. We have decided to take a lump sum of £70,000 from our pension pot in October and then receive an annual income of £10,880. Once we've paid off the mortgage and some other debts, we will be left with £35,000. My question is where should we put the £35,000, so we have easy access to it but it earns a good return?
From
DT/Swansea

A

The first question I would ask is whether it is sensible to take £70,000 from your pension savings. Many people aged 55 or more are keen to use the new freedoms to take money from their pensions but they also need to consider possible tax implications. Most pensions will allow you to take 25% of your fund tax-free but anything above this will be taxed at your marginal rate of income tax.

Some people can reduce their tax bill by spreading out their pension withdrawals over more than one tax year. It might also be the case that if you leave money in your pension, it will continue to be in a tax-efficient wrapper and you can still withdraw it, including any leftover tax-free entitlement, whenever you want in the future.

While pensions are primarily designed to pay an income in retirement, if it is right for you to make this withdrawal then it is probably sensible to use that money to pay off your debts first.

What you should do with any remaining lump sum will depend on your circumstances, objectives and attitude to risk. You mention that you want easy access to the money. Does this mean that you can't afford to lose any of it? If so, then it is sensible to keep it in cash.

If that is the case, then you can look to use your and your wife's annual Isa allowance and also, from next April, every basic-rate taxpayer will be able to earn up to £1,000 of interest from cash savings without paying tax.

If you are willing to take some risk with this money in the hope of generating a better return, a multi-asset approach could be the best solution as this reduces risks by investing in a range of different assets such as shares, fixed interest and property. A fund like JPM Multi Asset Income invests in many underlying stocks and focuses on capital preservation with low volatility. This fund also produces an income of 3.7% a year, which can be taken or reinvested.

However, before making any decisions I would suggest double-checking how much you should be withdrawing from your pension.

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