I have recently been made redundant and am in the process of downsizing my property, in order to release £200,000 in capital to live on.
I am 63 years old and have two sons, aged 19 and 24, who will inherit the new property one day – and I intend to use my newly released equity, plus my pension, to provide a retirement income. I have no other savings.
Of the £200,000 that I release by selling my current home, I want to keep £50,000 in easily-accessible products, £50,000 in short-term access accounts and £100,000 in a fixed-term investment. But I have no idea which institutions pay a reasonable rate of interest. Also would there be tax implications for me? I am not a gambler and therefore would not be interested in any risk.
Jonathan Fry, private wealth director at Jonathan Fry & Co, says you face two challenges: providing enough income to meet your living expenses today; and protecting your income and financial security against the effect of inflation over the longer term.
As you are likely to live a lot longer, so leaving all of your capital in cash deposits is unlikely to provide you with a good chance of protecting the real value of your income in later life.
That said, if you are totally risk averse and want to avoid any fluctuation in the value of your capital, then a cash-based solution may be the most appropriate. Depending upon the amount of pension income you are receiving, you may need to use some of your capital to supplement your income over the longer term.
First, you should place £5,340 into a competitive cash individual savings account (Isa) where it is currently possible to achieve a rate of 3.3 per cent. Interest is paid gross and is not liable to tax while in the Isa wrapper. You should consider investing the annual cash Isa allowance each tax year.
You say that you are “not a gambler”, and do not want the risk of equity exposure, but that you need a reliable income. With this in mind, we would suggest allocating £100,000 of your capital to a purchased life annuity (PLA).
The net income from a PLA can be significantly higher than that from a bank or building society due to a lower tax charge – as the majority of the income is deemed a return of capital and this increases with age. Also, the income will not fluctuate like bank interest, as it is guaranteed for the whole of your life.
At your age, a PLA bought for £100,000 could provide approximately £6,000 a year net of tax. This would provide a significant increase in your income, and be twice as much as the interest it would be possible to achieve from a two-year fixed-term cash deposit, which currently averages 3.8 per cent. However, while it provides a higher regular income, the PLA requires an irrevocable commitment of the £100,000 which would not then be available to you or your sons.
If you could come to terms with some volatility, there is also the option of investing £50,000 into a portfolio of higher yielding equities and bonds. The simplest route would be via some suitable collective funds. It would currently be possible to achieve a net yield equivalent to the return from a cash deposit, with the prospect that this income would grow over the longer term.
You are entitled to a personal allowance in the current tax year of £7,475. I have assumed you are a basic-rate taxpayer and, as such, will be taxed at 20 per cent. The amount of your state pension will depend upon your record of national insurance contributions but, if you are also entitled to an occupational pension, then your tax allowance is likely to be fully utilised.
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