WHAT to do with a £60,000 retirement lump sum is Mr R's dilemma. Based in the west of Ireland, he is 55 years old, married with three children and recently accepted voluntary retirement from the public agency. In addition to the £60,000, he will receive an annual pension of just £1,800 or £150 a month.
With such a modest income - he doesn't say if his wife works outside the home - it is just as well that he has "already set money aside to let his offspring complete college" and that his outgoings are low: A £60 a month mortgage payment and remaining (undisclosed) payments on a £3,000 car loan. "There is a possibility that I will work for a few more years, but I don't want this to cloud what I should do with the lump sum payment. Where can I get good security and income on a regular basis?"
Financial advisers consulted by Family Money, suggested Mr R looks at the prospect of paying off his outstanding debts with the proceeds from his lump sum in order to avoid future interest payments (mainly from the car loan).
With just £6,000 and six years left to pay on his mortgage, he is mainly paying off capital at this stage, but nevertheless would release an extra £60 a month or £720 a year into cashflow if he cleared that loan. Similarly, by paying off his car loan (let us assume it is down to £1,500) he probably releases another £100 a month. His lump sum has been reduced by £7,500 but his, monthly cashflow has more than doubled to £310.00.
Mr R is looking for both income and security for his retirement fund, which is now worth £52,500. He does not explain how risk averse he is, so we will assume that security is uppermost in his mind. Even though he does not want his continuing employment prospects to cloud his investment decisions, he still needs to keep in mind that if he can do without drawing down much income now, he will be able to build up a better fund for when he is genuinely retired say at age 65 or even age 60.
Our financial advisers suggested a number of options for Mr R: he could put half or three quarters of his lump sum (i.e. £25-£40,000) into a high yield fixed deposit account and from it draw down a regular income. Aside from the Post Office, with its consistently good value and state guarantee the Irish Nationwide, for example is currently offering a `Classic Quarterly Account' which offers 6 per cent interest on sums of at least £10,000, requires only 30 days notice for withdrawals (or income) and fixes the rate on a three monthly basis. Another good deposit option is Anglo Irish Bank's `Creative' deposit accounts which pay top rates over fixed periods but also allow you to benefit from rises in rates. If Mr R deposited £40,000 in any of these accounts he could expect gross annual income of about £2,400. (His gross annual income is now £6,120 up from £3,720).
It was suggested that because he has employment income opportunities, Mr R may want to consider investing the £12,500 balance of his lump sum for between five and 10 years in an equity based product which has a potentially higher return than a deposit account. There are five and 10 year with profit bonds on the market which are offering potential net returns of up to 8-9 per cent per annum. While they do carry a level of risk to both the capital and growth, the institutions offering them are top performing life companies such as Equitable Life, Scottish Provident, Standard Life and Friends Provident. Assuming a 45 per cent net return on his £12,500 investment, Mr R could theoretically earn another £5,600 over the five years, or a total return of just over £18,000.
Though not an equity based product, per se, a five year deposit tracker bond does have the potential to outperform the best deposits over the period; tracker also have the added attraction of completely guaranteeing the capital.
With so many permutations available, Mr R, at the end of the day would be well advised to seek out independent financial advice before he makes any decision. So many factors need to be carefully weighed: how long is he prepared to commit his funds? How risk averse is he? How much income does he really need? What is the state of his health and that of his spouse? A good adviser is one who will charge Mr R a reasonable fee for his time and advice rather than allow his advice to be commission driven by any product Mr R may ultimately buy.
