How can I earn 8.7% interest?

By THIS IS MONEY
Updated:

 

Please tell me if this is a workable way of getting a return of 8% on say £16,000 using a stakeholder pension for a 62-year-old man earning £20,000 per year.

pile of cash

Cash boost: How should I invest my pension fund?

A lump sum investment of £16,000 plus £4,000 added by the Inland Revenue makes a pension fund worth £20,000.

Buy an annuity immediately and receive a pension each year of £1,280 (according to Norwich Union).

This is equivalent to receiving 8% per year on £16,000 - or is there a better way of doing things? Mike, Hampshire

Danny Cox, head of financial planning strategy at independent financial adviser Hargreaves Lansdown, replies: This works very well and is known as an immediate vesting personal pension. Actually there is a better way: Pay £16,000 into a pension, the Government adds £4,000. Take tax-free cash of 25% or £5,000 which is paid back to you.

The resulting income (based on the rates you have supplied) would be £960 a year from your net investment of £11,000 or an 8.7% return.

There are pitfalls. The income is a level annuity guaranteed just for your lifetime and on your death it will cease.

You could incorporate a widow's benefit or an increase option, however this would reduce the starting income. The income is taxable and you cannot get your £11,000 back.

You need to have income of at least £20,000 to be able to pay £20,000 gross (£16,000 net) into a pension, there are also restrictions if you earn £150,000 or more, and you must be aged 50 or over to do this.

It is also important to check who is offering the best rate of annuity return and the rates of return could be higher if you are a smoker or in ill health.

In summary, this is a great way to exchange capital for high levels of guaranteed income.

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