Prepare for redundancy by de-risking

In the News  |     |   Investors Chronical

Lauren Peters


Matt is 52 and works in the NHS. He earns a salary of £41,000 a year, but thinks he might be made redundant in the next two years due to reorganisation.

"In all likelihood I will start to receive an NHS pension between the age of 55 and 58," says Matt. "If I retire early I would like to work part-time at least until I'm 60. My NHS pension is likely to be between £14,900 and £18,200 a year, depending on criteria such as redundancy and age at retirement.

"My state pension, which I am due to start receiving at age 67, is contracted out. My self-invested personal pension (Sipp) is valued at
about £150,000 and I intend to increase this by reinvesting £10,000 held in an individual savings account (Isa). I also expect to receive a bequest of £18,700 fairly soon.

Lauren Peters, chartered financial planner at Helm Godfrey, says:

Working out a retirement budget, and thinking about how much income you need and want in retirement is a great place to start.

By the time both you and your partner get to state pension age, it's likely you will be close to hitting your target retirement income of £30,000-£42,000 per year with guaranteed income streams alone: you will have two state pensions at approximately £8,000 per year each, your NHS pension at around £15,000- £18,000 per year and your partner's annuity.

The difficult part is determining how you will fund the years between early retirement and hitting state pension age.

Here, cash flow planning will be critical. This involves mapping all the different dates for obtaining various income streams, and then using invested pensions and/or any other savings to plug the gaps. You will need to consider different rates of return to determine whether or not the additional savings and investments will provide enough money to hit your target income. This will also tell you if achieving your target income is possible given your current investment mix and risk profile. It's usually worth consulting a financial adviser to help you with cash flow planning. It is critical to consider the impact of taxation, inflation and fees in a situation like this.

Regarding your NHS pension, you should be aware that taking the pension early - especially if not made redundant - typically leads to an 'early retirement reduction factor' being applied to your income. This could reduce the amount of annual income you receive by 3 to 6 per cent a year, for every year you draw the pension early.

Redundancy money can be contributed to your pension, as long as you don't contribute more than your total income for the tax year and, of course, assuming you don't need the money for anything else.

It's hard to say whether you should transfer Isa money into your pension without going into more detail with you. But it's generally a good idea to have both an Isa and a pension to draw upon in retirement. Pension income is taxable, apart from the tax-free cash component, whereas income from an Isa is tax-free. Having both accounts in retirement allows you to manage your income tax liability more efficiently as you can top up taxable pension income with tax-free Isa income - particularly useful for random lump sums.

And it's always worth having some accessible money. You can't access your pensions until 55 at the earliest, so you may prefer to keep the Isa for now just in case you are made redundant.

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