The Daily Telegraph - Saturday - Money
‘I’m ready to retire but I don’t trust Isas’
Dawn Chandler lost her job and needs to find the best way to use £300,000 of savings. Rachel Mortimer asks the experts
Like so many others last year, Dawn Chandler, 63, lost her job amid the economic fallout of the pandemic. She was made redundant in October after working in the hospitality sector for more than a decade, at a well-known racing company.
Now Ms Chandler is ready to retire, if she has the funds. “I now would like quality of life,” she said. “My job, which I did love, was very demanding and, when I was forced to stop, it made me realise what a treadmill I was on and that my health and family are more important.”
In 2019 Ms Chandler, who has two children and a grandson, used some of the funds she inherited from her mother to pay off her mortgage. This meant that when she recently made the move to Tunbridge Wells to be closer to her daughter, she bought her £500,000 property as a cash buyer.
“I have had to work really hard to get where I am, but I can’t afford to make a bad financial decision now and need to be careful,” Ms Chandler said.
She has two pensions, which combined are worth a little more than £ 194,000, and roughly £ 97,000 in National Savings & Investments Premium and Income Bonds.
Ms Chandler previously held money in an Isa, but pulled it out. She said she was unsure of the options available to her and wary of some of the marketing from her provider.
“I found it confusing and unclear; my previous Isa was earning me nothing but I had no explanation as to why. There are so many options and I have tried to do my own research, but no one was particularly helpful in explaining to me what was the best method and why,” she said.
Ms Chandler placed her redundancy payout of around £20,000 in bonds and has since been paying herself a monthly income from this sum. But now she wants to proactively manage her pensions and savings, and in the most tax-efficient way.
Alan Chan
Ms Chandler has a three
Dawn Chandler, who used to work at a racing company, has no mortgage on her new home year wait before her state pension is payable at age 66.
I would recommend she completes a BR19 State Pension Forecast form to establish her state pension entitlement and if she can boost it by making voluntary National Insurance contributions. A full state pension is currently £9,110 a year.
With regard to the Zurich and Scottish Widows pensions, her main options are to buy an annuity, use “flexi-access” drawdown or perhaps something in between. An annuity guarantees an income for life and peace of mind. On a combined pension pot of £194,000, a quarter – so £48,500 – would be taxfree cash paid upfront. This leaves £145,500 to secure an income.
On current annuity rates this could achieve a fixed annual income of £7,050 before tax. If Ms Chandler would like an increasing income raised in line with the RPI each year, this would reduce her income to £4,110 to start with.
Assuming inflation is 2.5pc a year it would take 23 years for the RPI annuity to catch up to the fixed annuity. And it would take more than 40 years to break even in terms of the cumulative income received. If the actual rate of inflation is lower, it will take longer to break even and vice versa.
It is no longer compulsory to buy an annuity. But if Ms Chandler decides that an annuity is right for her, she could consider spending her savings first and defer the annuity purchase until a later date. Annuity rates will naturally go up with age. For example, at age 65 on the same money, a fixed and RPI annuity could be £ 7,530 and £4,550 a year respectively.
On the other hand, with flexi-access drawdown the guardrails are down. She will need to invest her pensions to suit her risk profile, while taking enough risk to provide a sustainable income for life.
If Ms Chandler is willing and able to accept variable income year to year, this may be right for her. Her risk appetite appears to be fairly low, however.
If she doesn’t need the taxfree cash upfront she could take smaller chunks each
‘My Isa earned me nothing and no one could tell me why. I found it confusing and unclear’
year instead together with her income to be more tax-efficient.
Megan Rimmer Chartered financial planner at Quilter, the wealth manager
The end of the tax year is fast approaching and it’s a prime opportunity to use any allowances, the most important being the Isa allowance of £ 20,000. Isas are the most tax- efficient vehicle as any income or gains are tax free. But should you always pay into one each year? In short, yes.
Your financial plan is like a house: the foundations are the structure of your savings, investments or income. The brickwork and furnishings are the investments used to help meet your goals and the roof is your overall happiness, peace of mind and ability to do what you want. The roof and windows will change with objectives but the foundations, if set properly, will rarely need to change.
As Ms Chandler wants to ensure she has ample funds in retirement, reviewing her pensions should be her main priority. What are they invested in and how can she take money out?
Having confirmed she is comfortable taking some risk with a proportion of her savings, she could invest £20,000 into a stocks and shares Isa this tax year and next. This will meet her objective of tax-efficient growth and leave her with an emergency fund.
If she feels nervous about this she should consider moving £20,000 into a cash Isa until she’s met a financial adviser she trusts. Her allowance won’t go to waste and she then has the option to transfer this money to a stocks and shares Isa later. Ms Chandler should check her foundations first and hopefully she’ll end up with a complete house.
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