Wealth check: How best to invest my redundancy payout?

Having taken early retirement, Susan now has a £20,500 lump sum. But how can she secure her pension and help her sons to buy their first properties?


The patient


Susan Thompson, 51, from Halifax, seems at first glance to have a pleasant dilemma, thanks, in part, to the economic downturn. Having decided to take advantage of a round of redundancies at work, Susan retired in September. She now has £20,500 to invest thanks to 19 years with the same employer, not to mention a final salary pension scheme worth about £3,000 a year.

"I want to be secure as I get older, and to invest wisely in order to get additional income from the interest on my savings and investments," says Susan. "What I need to know now is what to do with my money."

She plans to continue paid work for three or four more years, but despite her small pension provision and a cautious approach to investment, Susan hopes to retire on about £10,000 a year as well as help sons Daniel, 22, and Luke, 20, get on the property ladder.

"My husband, Stephen, and I would like to downsize our home in another three or four years, when I give up paid work, in order to be able to give my two sons a sum of money to help them purchase their first properties," she says. But can all this be achieved without adopting a high-risk approach to investing?

The cure

Susan's retirement hopes seem particularly ambitious until her savings are taken into account. "Luckily for Susan, unlike so many people in Britain, she is not caught in a quagmire of debt," says Darius McDermott of financial adviser Chelsea Financial Services. "Instead, she can look forward to a reasonably comfortable pension." But even with another job, such a defensive approach to investments means Susan must do some careful planning and juggling to make the most of her ready cash and investment income to ensure she achieves her financial aims.

"Susan may find that she can only achieve her retirement income aims by spending her capital – the underlying money rather than the returns it earns – until the couple's state pensions are paid in several years' time," warns Duncan Carter of Clearwater Financial Planning. "In fact, she may need to think about revising either her attitude to risk or her sights for the amount she hopes for. Even so, Susan may find she needs to work for longer to reach her goals."

Savings and investments

The recent injection of over £20,000 to Susan's financial portfolio reinforces an already strong cash position. Both she and Stephen have cash ISAs worth £5,100 – thanks to recent legislation that now allows the over 50s to save this level of tax-free saving every year. Susan also has a 2008 ISA worth £3,600.

Meanwhile, the couple have a fixed rate bond with £35,000 which matures in two years, a web saver account containing £8,000, and a corporate bond fund worth a further £8,000 that has now matured – not to mention current accounts worth £6,500 between them. Meanwhile, cautious or not, Susan and her husband have £22,000 in equity shares in the Lloyds Banking Group. There are even premium bonds worth another £20,000.

"Susan should start by breaking down her financial planning into three phases – the immediate future, medium term, and longer term and retirement," Mr Carter suggests. "While she works on finding another job, I would focus on the shorter-term planning issues. Even though she has plenty of cash savings, Susan should consider keeping her redundancy money liquid and accessible until she knows where her everyday money is coming from. At this early stage, she can't be sure how long she may be out of work and may need to use the capital to help to support her income."

"With her cash buffer in place, Susan then needs to make the right decisions about supplementing her pension with a healthy stream of investment income," Mr McDermott continues. She should review her web saver account to make sure she is getting the best possible rates for her money. Equally, she should keep a close eye on the performance her corporate bond offers and, if necessary, consider shifting that £8,000 to a better performing, flexible fund run by respected managers such as M&G's Optimal Income fund or the Henderson Strategic Bond fund.

"As she is not willing to forgo her aversion to risk, Susan is limited in terms of what she can invest in," Mr McDermott adds. "But there are still a lot of investment products she should be examining. Frankly, premium bonds are not the best option for those looking to boost income as they don't pay a consistent yield. With premium bonds instead of interest payments, investors simply have the chance to win tax-free prizes, which have themselves been reduced recently."

"Diversifying her equity holdings would be a good place to start," he says. "Holding a large portion of your capital in a single stock is about as high on the risk scale as you can get. Susan should move this money into a well-diversified cautious unit trust where she will have exposure to a pool of assets managed by an experienced portfolio manager, such as the Miton Special Situations fund."

And then there is the question of eventually investing the redundancy payout. "Susan's lump sum of £20,000 could be invested in a three-year deposit-based bond," suggests A J Somal of Uniec Financial Solutions. "Barnsley Building Society is currently offering 4.8 per cent gross interest fixed rate on a three-year bond. With Susan's focus on income over the next few years, the fact that she is about to give up work is significant as she will become a non-taxpayer. If she doesn't find or look for further paid employment it may be worth informing her bank to pay the interest on her deposit accounts gross, instead of net."

Property

Susan has decided that the best way to help her children achieve their first steps on the housing ladder is to move to a smaller home to free up some cash. But if the past year has demonstrated anything, it is that there are no absolutes in the property game.

"Susan mentions that she would like to downsize the house in three or four years' time," Mr Somal says. "And this is certainly a tax-efficient method of raising finance. But more research needs to be done when it comes to buying and selling property at the time they decide to put their home on the market, particularly in terms of marketability and the ease with which the property can be sold."

Will and insurance

Susan's decision to take redundancy has other implications. For instance although she has a will, unlike half the population, but now has no personal insurance. Although income protection may no longer be appropriate, Susan and Stephen should look at policies that may help to support their family should something untoward occur, such as critical illness or life cover.

Do you need a financial makeover?

Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Sport
Australia vs New Zealand live
cricket Follow over-by-over coverage as rivals New Zealand and Australia face off
News
Zayn has become the first member to leave One Direction. 'I have to do what feels right in my heart,' he said
peopleWe wince at anguish of fans, but his 1D departure shows the perils of fame in the social media age
Life and Style
Researchers found that just 10 one-minute swill-and-spit sessions are enough to soften tooth enamel and make teeth vulnerable to erosion
health
News
i100
Arts and Entertainment
The Regent Street Cinema’s projection room in the 1920s
film
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing