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40% Tax
Alan Selwood
Posted: 05 March 2013 16:47:45(UTC)
#11

Joined: 17/12/2011(UTC)
Posts: 3,379

1. I'm not the person to ask about SIPPs, as I retired long enough ago for this never to have been relevant to me, apart from reading subsequently that I could do small SIPP payments each year even without relevant earnings. Everything I've read about draw-down makes it sound complicated and full of traps for the unwary. Not for me, even if it had been available!

I have to say that since I drew on a small Personal Pension Plan that I contributed to in the early 1970s, and found that my brilliantly-performing fund would only buy a pretty pitiful annuity because of the low annuity rates (they are worse still now!), I rather went off the idea of pensions altogether. The real problem I find is that the annuity market sets the rates and never gives anything away, and the government currently sets the interest rates at a really miserly level, and the annuity market therefore starts at a very low level of benefit for the pensioner, especially after the insurance company's profits.

2. Widow's pension is always calculated from the full pension that the pensioner would have received : the TFLS only reduces the employee's pension, not his widow's. The widow's pension is also incremented in the same way as the employee's pension.

3. Beware of the "3% increases" figure.
There are 2 traps here for the unwary :
a) If the reason for increasing, such as "RPI up to 3%" comes in with a lower figure, you get the lower figure (naturally); but if inflation is, say, 7%, you only get 3%, so you lose ground in every year when inflation is over 3%, and don't make it up when it's under 3% (unless the pension fund makes a discretionary increase - and can afford to do so!)
b) If your pension scheme was a contracted-out one, which I suspect it was, your pension payments will be in 2 parts : one that matches the government's Guaranteed Minimum Pension, and one that covers the rest.
I've found in my own case that although I certainly get the stated increases to 'the rest', I don't get any increase at the moment from the GMP part, so the overall pension doesn't go up as much as expected relative to the RPI.

All this being the case, I think you would be wise to apply the cash you receive from the firm, after keeping back enough to cover any higher-rate tax liability on the redundancy money exceeding £30,000 !, to investing for growth of income in particular.
This means avoiding the highest-paying shares and funds in favour of lower-paying ones that have more scope for growing dividends in the future. For example, Centrica and Vodaphone shares may pay a comfortingly high dividend at the moment, but the big question is 'How fast and how reliably will future dividends grow in the next 20-30 years from this source'?

Most investment commentators will accordingly try to steer you away from shares and funds yielding 5% to 8%, and towards those yielding no more than the market average.
If you can find, for example, an investment trust that yields say 3% now, but on looking at its past track record it has grown the dividend by 5% p.a. for the last 20 years, then it's a much better money-spinner than something paying 4% now but with past growth of dividends of 'only' 3% p.a.
Citywire statistics, and those on Digitallook and other websites may give you a feel for which ones are REALLY better bets.
Also, with investment trusts, you can always email the company itself and ask for stats on 'income growth on a year-by-year basis for the last 20 years, or since launch if more recent'.
Good firms will leap at the chance to help you!
Alex Peard
Posted: 05 March 2013 22:07:53(UTC)
#12

Joined: 05/05/2012(UTC)
Posts: 53

I was in a similar position when I retired five years ago and had a significant severance package. I took the £30k tax free plus worked out how much more I could take and pay only basic rate tax (this depends how much you will have earned up to the July when you leave and how much pension you will receive in the balance of the tax year).

The balance of the severance I got my employer to pay as an employers contribution into my DC pension plan, yours could be paid into a SIPP. You could then take the 25% tax free and the balance could be withdrawn under flexible drawdown rules (you could buy a small annuity to get you to the £20k secured income required or wait until you get the state pension) ensuring you keep within the basic rate tax band overall each year. This way you should avoid paying higher rate tax on your severance payment.

As far as investments are concerned I've always been a fan of investment trusts because of the lower charges and gearing potential but the downside is the potential for the discount to net asset value to move against you if this is not actively managed by the company. A mixture of IT's and OEIC's with the emphasis on equity income is my preferred route at present.

Good luck!
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