‘Should I cash in my final salary pension?’

Our reader’s retirement pot is dangerously close to the punitive lifetime cap. Will Kirkman looks for solutions

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, inflationlinked 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 h savings and £120,000 in a stocks and nd shares Isa waiting to be invested.

Nick Onslow Chartered financial planner at the RU Group

The good news is that Mr r 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 s this year, Mr Campbell has as seen his portfolio fall signifficantly, mainly as a result t of rising oil prices and the war in Ukraine. This can be

Neil Campbell, pictured below, wants to ski and travel in retirement 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.

John M McCreadie Head of advice at MPA Financial Management

Manag Moving Mov out of a final salary pension si is not normally appropriate for f most people. This is because payments from such schemes are guaranteed throughout the recipient’s lifetime and a percentage is payable to any dependants after death. He could use the yearly starting income of £9,000 as a foundation to meet his essential expenditure along with his state pension without taking any investment risk and with payments increasing in line with inflation. This pension would be assessed as having a value of 20 times its annual payment, or £180,000, for lifetime-allowance purposes – less than the cash-in value of £284,000. This therefore reduces the risk of breaching the lifetime allowance and having to pay more tax.

Whether he will breach it or not is impossible to predict, as it depends on the actual growth his portfolio achieves, but not cashing in his final salary scheme will make it less likely.

Mr Campbell still has headroom to contribute to his pension. If he is not comfortable doing that now, he can still, before he stops working and carry it forward for three years.

As he has a spread of investments already, Mr Campbell could rebalance his portfolio on a gradual basis, taking profit from funds that have done well and reinvesting the money in a way better suited to his needs.

He could do this himself, by picking assets that meet his “risk tolerance”, or by appointing a wealth manager, or by using one of the many risk-rated portfolio services available.

Looking at the current portfolio, there are a lot of active funds that he has picked, along with a number of shares such as BT and easyJet. He has taken quite a few losses on the funds he has chosen and he invested £96,000 in the Woodford Equity Income fund, which turned out to be disastrous.

There does not appear to be any real strategy behind the fund choices. As an adviser, I would look to use some form of professionally built model portfolio, which would spread risk, in contrast to his apparently haphazard method at the moment.

He has put some money into the Vanguard LifeStrategy 80pc Equity fund (see Fund of the Week, page 11), which uses passive funds to invest in global markets and is very cheap at a cost of 0.22pc a year. I would look to have more of this fund, alongside something like HSBC Global Strategies Adventurous at a cost of 0.21pc. Both would give him stock market exposure at a very reasonable cost and spread his risk much more than he has done.