We are all guilty of spending time dreaming about retiring. This is particularly true when you have had a stressful day in the police service.
If you are actually approaching retirement from the police in the next few years there are so many things you will be thinking about. One of the most important financial considerations is how to make best use of the lump sum from your pension.
The Money Advice Service has put together a three-step plan to help with investing a lump sum which is great for a detailed approach to planning how to invest. Here we have put together a simpler list of the top seven things to help you start thinking about how best to make your lump sum work for you and your family in the long run:
1. Pay-off debts
Consider paying off high interest debt. You may not want to pay off all your debts with your lump sum but it could pay to deal with any high interest debts. Currently the interest rates on credit cards are likely to be significantly higher than anything you could earn in a savings account or by investing the money. So it could end up saving you money in the long run.
2. Pay-off your mortgage
It may be tempting to pay off your mortgage but if the interest on your mortgage is very low, you might be better off investing the money for capital growth instead. It is very important to check the terms of your mortgage before you make a large overpayment. Many providers will charge you for early repayments before the term of your fixed rate is up.
3. Rainy day fund
Make sure your rainy day fund is topped up. As a general rule of thumb aim to have the equivalent of three months income or three months household expenses. In retirement it is still important to make sure you can get easy access to emergency funds in case you have unexpected costs that you haven’t budgeted for. The exact amount you need depends on your financial needs and responsibilities.
4. Investing for children
If you are thinking about putting aside some money for a young person a Lump Sum Junior ISA could be a good option. Anyone, including grandparents, uncles, aunts, Godparents or family friends can pay into a Lump Sum Junior ISA for a child as long as they have the parent(s) or guardian(s) consent. Junior ISAs are a good choice if you would like to help fund university fees, contribution to a house deposit or even pay for a wedding as they allow access after the age of 18.
5. Invest in property
If your lump sum is large enough, then a buy-to-let can be a good investment. If you can get enough rent to cover your expenses you are effectively getting someone else to buy the property for you. There are some low cost buy-to-let mortgages but recent measures introduced by the Government mean for some investors, buy-to-let will no longer deliver the returns it once did. Rental yields can look enticing, but are often unrealistic once you have factored in stamp duty and maintenance costs. If you are considering this option do make sure you have done your research and calculated all your costs.
6. Treat yourself
You don’t want to fritter all your lump sum away and have nothing to show at the end but you may want to earmark some for a new car, a dream holiday or house renovation. After all you have probably spent over 25 years in the police service and now deserve that well earned treat. The key is to plan this spend carefully, ensuring you don't overspend.
7. Use your tax-efficient ISA allowance
Do not leave your lump sum in a bank account earning very little interest for too long. Consider using your tax-free ISA allowance. Invest at the beginning of the tax year (6 April) to get the maximum benefit. You can add to your ISA each year, using your new ISA allowance. The Metfriendly Lump Sum ISA is designed for the serious saver looking to invest for the medium to long term. It is a Stocks and Shares ISA.
Financial planning starts with knowing where you stand with your money. Before you commit yourself to spending, investing or giving gifts it makes sense to take some time to consider your financial situation and your options. Come along to one of our free Pre-retirement Seminars for more help and tips.
Or If you've already retired and would like to talk to us about investing your money for your or your family's futures, book a one-to-one with one of our field team.