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Q&A: Winding down from work
Reader's query
I am 63 years old and am going to be made redundant at the end of this year. I'm hoping to use this as a chance to improve my work/life balance and have a gentle run down to retirement.
I have £35,000 invested in a five-year Legal & General Property & Distribution fund, which I took out at the end of 2006 for growth. In addition, I have £6,000 in a Barclays Mini ISA (paying 6.25%) and have used up this year's contribution. I have invested a further £2,500 this year so far and the same in an ISA in my wife's name. Finally, I have £4,000 in an easy-access savings account for emergencies.
I have no mortgage to pay or outstanding loans. My redundancy should give me around £35,000 and I hope to receive a pension of £450 a month.
How should I invest my redundancy money when I receive it? Ideally, I would aim to work either part-time or in the voluntary sector. But, to a certain extent, this plan is dependent on what income I can achieve from my funds, since I will be unable to claim state benefits. I think that a total of £1,100 a month, which includes the income identified above, should be sufficient to meet our needs.
DA/Tyne and Wear
Expert's advice
Simon Pritchard-Jones
Managing Director of WH Ireland, specialist in financial planning
You've done well to not only pay off any debts and mortgages but to build up a savings pot. However, you'll struggle to achieve a monthly income of around £1,100 a month from your savings and investments, and you would most probably have to forgo some capital appreciation from your savings in the interest of generating a sufficiently high income.
The work pension will provide the largest chunk of your income, but you should check whether you will receive the £450 a month now or at the scheme's normal retirement date at some point in the future. Retiring before the pension scheme's normal retirement date could lead to a significantly reduced pension.
You should also remember that your income from the work pension scheme is subject to tax, diminishing your earnings further.
On a more positive note, the pension could be index-linked, increasing each year to try and keep pace with inflation. The majority of pension schemes provide a tax-free lump sum at retirement, which could provide a source of additional income, and you should check this out with your employer.
With regard to generating an income, you should be able to switch your holding within the Legal & General Property & Distribution fund to generate a regular income. If it's held in an investment bond, you could take advantage of the option to withdraw 5% of the initial investment with the tax deferred until you cash in the plan. Withdrawals can be taken monthly, providing an income of £145 a month, although the capital appreciation of the fund will of course be affected by the withdrawals.
To generate further income, you could request that the interest generated from your Barclays ISAs be distributed, as opposed to rolled up within the account. As the funds are held within an ISA, they will be distributed tax-free. And I would recommend retaining your easy-access savings account as an emergency fund, although you should shop around to see if you could earn a higher rate.
As you intend to work part-time or in the voluntary sector, your future income is unknown. So it's important that you invest your redundancy payment in an environment where you can switch the investment from income producing to capital appreciation. You may wish to consider high-interest deposit accounts such as IceSave, which currently offers 6.3% gross, with interest added monthly - but bear in mind that interest will be taxed at source at 20%.
It you're worried about recent events, such as the fate of Northern Rock, you should consider pensioners' guaranteed income bonds, provided by National Savings and Investments. These are guaranteed by the Treasury and are therefore one of the safest forms of investment. National Savings offers fixed terms of one, two or five years, and interest is payable monthly, gross of tax. Due to your uncertainty over your future income, you could opt for a one-year term, currently
offering 5.43% AER.
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