For many members of the police service, approaching retirement is a time of big decisions. And one of the biggest is what to do with their commutation. For some it will be the largest sum of money they’ve ever had – and one of the biggest financial decisions they will ever make.
So let’s take a look at some of the main areas to consider.
Understandably, this is often the easiest decision to make – pay off the mortgage. There may just be a few thousand pounds left to go, there may still be hundreds of thousands. But the opportunity to finally own your home outright is very attractive. As you move into retirement you will probably face a reduction in income, so removing one of the biggest monthly costs you have, and fully owning a substantial asset that will hopefully increase in value year by year is a good financial move.
Unit Trusts (pooled funds – also known as OEICS and Mutual Funds)
A unit trust is a professionally managed pool of money from a group of investors. Instead of deciding for yourself what shares, bonds or property to buy, a fund manager makes these decisions for everyone in the group — deciding what to buy or sell, and when. Some funds will be higher risk than others, and no fund is a sure thing.
You may wish to invest in more than one fund to spread out your risk. Putting the bulk into a low-to-medium risk fund, and a lesser amount in a more risky fund is a common strategy used by many.
Essentially you are paying an expert to do the thinking for you. Bear in mind there will be fees to pay for this service, and that experts are not always infallible! Like all other options, do your research and be careful who you trust with your money.
When you invest in shares (also known as equities or stocks) you are buying a stake in the future performance of a company. Some companies can return spectacular results – others can sink like a stone taking your investment with them. But generally most companies aim to produce steady growth and profits, and most investors in the share market are just looking for reasonable returns on their money, including regular income from dividends.
Investing in shares is risky because their value can change from day to day; also, dividends depend on profits being made. But there is also great potential for growth and total return. When investing in shares, make sure your portfolio is diversified across different market sectors, industries, and even countries. The fewer stocks you own, the more potential risk you are taking. That’s why many investors prefer to invest in the stock market through pooled funds.
Companies, governments and other entities issue bonds to raise capital. In return they usually repay the bond owners with interest. So a bond is kind of like a loan. When you purchase a bond, you are lending money to a company or government for a certain period of time. The bond certificate is a promise that they will repay you on a specific date, usually with a fixed rate of interest paid over the term of the bond.
They are popular because they are relatively safe and provide a reasonable fixed return. But high yield bonds normally come with a greater chance that the issuing company could default.
Aside from paying off your mortgage, there are other ways to make further investments in the property sector.
Many people purchase residential properties to rent out, or invest in pooled funds that deal exclusively in property – including offices, shops and warehouses. Property has the potential to greatly increase in value over time. As with shares, you earn money when you sell property for more than what you paid for it. You will also earn an income. Keep in mind that it can take time to sell a property, and that there are costs involved in buying, selling, and owning it. Pooled property funds can suspend redemptions if they cannot sell assets quickly enough to meet demand.
We can’t finish this article without giving ourselves a little mention! As a trusted financial provider exclusively to police service members and their families, we receive many millions of pounds each year to invest on their behalf.
Investing with Metfriendly is a low-to-medium risk option with the potential for higher rewards than cash-based deposits, and has regular annual rewards. Metfriendly has two investment products that are worth considering – the ISA and the With-Profit Bond.
And Metfriendly also has a special investment offer which means any investment of £40k or more will have an extra 1% added to it on commencement.
You can find out more about investing with Metfriendly at www.metfriendly.org.uk/invest