Money Makeover: ‘Should I cash in my £284k final salary pension?’

Planning for a comfortable retirement can be stressful enough without the worry of falling into a punitive tax trap.

But that will be the reality for millions of people after the Treasury maintained the freeze on the lifetime allowance last week – a freeze Telegraph Money is campaigning to scrap.

Neil Campbell, 51, from Berkshire, faces falling into the trap if his money is not managed carefully. Mr Campbell is semi-retired, but still occasionally earns from buying, developing and selling properties. He plans to stop working completely in the next six years and is aiming for an annual income of £50,000, which he plans to spend on travelling in Asia, and skiing.

He has £711,000 in a personal pension held in a variety of bonds, stock market funds and individual shares. However, the portfolio is a bit muddled and contains 17 funds and nine shares – including four airline stocks. His investments took a hit last month and he now wants to rebalance his portfolio to avoid market shocks in future.

He also has a deferred, inflation-linked final salary pension worth £9,000 a year with a cash-in value of £284,000. He is unsure whether to cash it in and add the money to his Sipp. Either way, he fears he will breach the lifetime allowance by the time he retires.

He also has £50,000 in cash savings and £120,000 in a stocks and shares Isa waiting to be invested.

Nick Onslow, chartered financial planner at the RU Group

The good news is that Mr Campbell is well on the way to reaching his aim of having a £50,000 income in retirement that can rise by inflation every year.

However, like many of us this year, Mr Campbell has seen his portfolio fall significantly, mainly as a result of rising oil prices and the war in Ukraine. This can be worrying, but the fall in March 2020, as a result of Covid, was ­significantly worse; and those losses were fully recovered for most people within a year, so he shouldn’t panic.

Mr Campbell’s portfolio has a large number of different investments, including bonds, funds and individual stocks. But it isn’t clear what level of overall risk he is actually taking or wants to take. He is also paying a variety of fund charges and, of course, making changes will involve trading costs. While at first sight his portfolio looks well diversified, many of the funds invest in the same things.

He should take some time to get the right mix of stocks in a well-diversified global portfolio. He could also consider a more ethical approach, as this is where the market is moving.

As for his pensions, Mr Campbell’s index-linked guaranteed retirement income of £9,000 from his final salary pension and his future full state pension of £9,628 in today’s terms will ­represent 37pc of his target income before tax and 35pc after tax.

The current lifetime allowance for pension savings is £1,073,100 and based on a 5pc annual return he would reach this level in just over eight years. A quarter of the fund, or £268,275, can be drawn tax free, while the remaining funds would be taxable at his highest marginal income-tax rate when taken as an income.

Mr Campbell could retain his £50,000 cash savings as an emergency fund and invest the money in Premium Bonds, which are tax-free and instant access, and give him a chance to win a prize of up to £1m.

Related Posts

Leave a Reply

Your email address will not be published.