Do you have a financial anxiety, dilemma or quandary? Ask Jessie Hewitson, veteran money journalist and editor, and new financial agony aunt for The i Paper. Jessie is answering readers’ questions while consulting with the top experts in the field (many of whom charge high fees) to get readers the very best advice. She will combine this with her own life experiences, which includes not always making the most sensible financial decisions in her personal life. Email questions to money@inews.co.uk, with Ask Jessie in the subject line and she will get to work.
Mick asks
I’m 52 and medically retired. My pension is £9,300 a year and rises in line with inflation. I don’t receive any benefits and I own my home outright. I have no children or partner. I’m pretty frugal and I manage on my pension and save for one-off purchases. I’ve built up savings of close to £100,000 of which £70,000 is in a self- invested stocks and shares ISA.
I want to know whether I should put most of my savings and ISA into a pension until I’m 60 or over, partly because it should unlock access to some help with things like council tax payments, government insulation schemes, prescription costs etc. Paying (after single person discount) over £1,200 per year council tax on an income of £9,300 really stings! What should I do?
Jessie says
We had a conversation after you got in contact, when you told me you were retired under medical grounds at the age of just 42. You live in south Yorkshire, and up until ten years ago worked in the civil service.
You have experienced problems with anxiety and depression your whole life. When you worked, you were a high performer which earned you leeway but over the years occasional days off became weeks and then eventually months.
Initially you were dismissed and received a lump sum as part of the deal, which helped you clear your mortgage. You applied for Employment Support Allowance (ESA), a benefit for people who can’t work because of sickness or disability. You describe the process as “hell”, particularly as you were having to go through it while unwell. Initially you were refused, but then you appealed and your GP and psychiatrist provided reports to support your case which was successful in the end.
Scared that the ESA could be taken away by a process you didn’t trust to be fair you looked at the criteria for a medical retirement. This is an option for people who have a sickness or a disability that prevents them from working, allowing their pension payments to kick in before the usual minimum age of 55.
After a formal process, your employer decided you met the threshold and you describe the impact of this decision as “saving my life”. The medical pension payments were almost exactly the same amount as the ESA, but it was an amount you knew would never be taken away from you. Now you spend your time helping your mum and dad with their shopping, gardening, DIY and their life admin.
Reading your emails, which were moving, it was easy to see why you worked at a senior level. You judged early on in your career that you were unlikely to be able to work for the long-term, so prioritised being debt-free and overpaying your mortgage while you were earning.
You managed to save £100,000 and own your house outright – all before the age of 52 and having not worked in the last ten years. This is a significant achievement, as is negotiating the medical pension when you were unwell.
So to your questions. As you say by the time you hit the state pension age – 68 – you will be in a pretty good position. If we factor in your existing pension, a full state pension (you are getting National Insurance credits even though you aren’t working) and an income from your savings you are looking at an annual income of around £22,900, leaving you with £30,000 in cash savings for emergencies. This assumes you draw around 3 per cent from your savings a year, which may mean that you live on the interest, and never run out of money. This isn’t a fortune, but it is over double what you are receiving now. You would pay around £1,500 a year in tax, factoring in your personal allowance of £12,750, and that the income from your savings would be tax- free.
In terms of whether you should move your savings into a pension, there are some issues. One is tax. At the moment the bulk of your savings are in an Isa and therefore tax-free, but if you move the money into a pension this would likely change. While the annual pension allowance, which determines how much you can pay into your pension tax-free a year, is usually £60,000, if you are not working and therefore have no earnings, you can only pay in £2,880 a year. Given how little you would be able to put into your pension, this wouldn’t move the dial in terms of being eligible for benefits.
Justin Modray, founder of Candid financial advisers, looked into whether you could get what is known as a “purchased life annuity”, which is similar to a pension annuity (where you get an income for life in return for you handing over a pot of cash) – only using money from outside a pension. Were you to do this, and buy an annuity with your £70,000 cash and leaving you £30,000 for emergencies, this would give you an income of £4,000 a year (for one that isn’t inflation-linked; £2,000 a year for one that is). Up to half of this income would be liable for tax (unlike 100 per cent of the savings tax-free as they are in an Isa).
The issue then is whether you could claim benefits with £30,000 in savings, and your pension income, and how much you would pay in tax, and whether this would be more than the amount you would receive in benefits. Wendy Allcock at EntitledTo cautioned that buying an annuity may be classified as deprivation of capital in the eyes of HMRC, and therefore could rule you out of receiving benefits. She added you could apply for a PIP – personal independence payment – which won’t take your financial situation into account, but I’m sure you’ve thought of this and wonder if you have been put off doing this by your bruising experience with the ESA.
Really the most sensible advice seems to be to stick with what you’re doing, as you are doing everything right. Modray recommends focusing on investing sensibly. He suggests the Vanguard LifeStrategy range of funds for a “buy and hold” investment (ie one for the long-term and won’t require too much work on your behalf), which come with low fees.
These allow you to hold between 20 per cent and 100 per cent in global stock markets – depending on which ones you choose according to your risk appetite – with the rest held in fixed interest ‘bond’ type investments, a safe cash-like place for your money.
I hope this has been helpful and I really do wish you well. While I appreciate you haven’t had the luxury to be more casual about your finances, your assiduous saving has made your difficult situation easier. You will not be forced into work – and that, for you, has been life-saving.
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