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A Fin24 user wants to invest a ta- free lump sum in an investment policy. He writes:
Please could you advise. I am 65 years of age and can very soon pull out a tax-free lump sum from my retirement policy.
READ: Tax on a lump sum invested
I wish to save this money on an investment policy.
Richard Carter, head of product development at Allan Gray, responds:
There is no one-size-fits-all answer to your question, as the answer will depend on your personal investment goals, risk profile, time horizon, current portfolio composition, what you intend to do with the remaining savings in your retirement policy and whether or not you need to draw an income.
The key risks faced by most retirees are inflation, market risk and longevity risk. These risks need to be managed with appropriate asset allocation to drive returns, and appropriate drawdown rates to make sure your money does not run out.
As your decision around what to do with your retirement savings will probably be the most important financial decision for your next 30 or so years, it is worthwhile discussing your options with a good, independent financial adviser (IFA).
An IFA will reduce the risk of a disconnect between your expectations, the way you construct your portfolio and the amount of income you draw down.
READ: Monthly versus lump sum ETF investments
As your question is about the tax-free lump sum, we will focus on this aspect, comparing some of the options available to you:
You could consider investing the lump sum in unit trusts. While you could also consider exchange traded funds, endowment policies and other investment vehicles, unit trusts offer affordable, flexible and convenient access to financial markets. Unit trusts allow investors to pool their money with other investors who have similar investment objectives.
A professional asset manager uses the pooled money to invest in different financial instruments according to a stated investment objective. Most fund managers allow you to withdraw, switch and contribute as and when you wish.
A good solution for most investors is to choose a unit trust where the investment manager can invest in more than one kind of asset - for instance, equities, bonds, cash and property - such as a balanced fund.
Because you invest in a single fund, you don’t have to worry about how to divide your exposure to different asset classes. The fund manager does it for you. This saves you having to decide when is the best time to enter or exit the market.
ALSO READ: What to do with a lump sum?
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