Lump sum. Why would you?

Booradley_2 · 8 May 2009 at 2:09PM

A lot of people here think that being able to take a lump sum from their pension fund on maturity is a good thing. If you need the maximum monthly pension and are in good health why would you want to? If you have reasons you can actually get more by contributing less or nil for say the final two years. Once again why would you want to decrease your monthly payments? Is it worth it just for the tax relief?

Genuine question

Boo

dunstonh · 8 May 2009 at 2:31PM

A lot of people here think that being able to take a lump sum from their pension fund on maturity is a good thing.

Because on personal pensions it is. On defined benefit schemes the situation can vary depending on the commutation factor and personal circumstances. I am going to asssume money purchase schemes because of how you worded your post.

If you need the maximum monthly pension and are in good health why would you want to?

Assuming personal pension and no capital requirement, you would use the 75% to buy a lifetime annuity and the 25% to buy a purchased life annuity. That should give a higher income than 100% buying a lifetime annuity (although small funds it may not due to minimum premium requirements and larger funds often being able to get better terms).

If you have reasons you can actually get more by contributing less or nil for say the final two years. Once again why would you want to decrease your monthly payments? Is it worth it just for the tax relief?

tax relief is important. Without it the pension wrapper is dead. Indeed, for many people, especially at the moment, if you are already retired but under age 75 and use savings to provide an income then paying into a pension can be a great idea. It doesnt just have to stop at 65.

Stopping a few years before you retire isnt necessary. You can reduce the risk of your investments if you wish or you can segment your pension so you phase the drawdown of it over a period.

Booradley_2 · 8 May 2009 at 3:06PM

Thanks dunstonh
Is there a difference then between a purchased life annuity bought with the 25% and the lifetime annuity bought with the non withdrawn 75%?

boo

MikeJones_2 · 8 May 2009 at 3:50PM

Hi Booradley,

Good question.

Some people plan to take the maximum cash, so they don't perceive it to be a reduction to their income at all.

However, to compliment dunstonh's replies, much would also depend upon the size of the pension and the amount of the tax free cash.

Depending upon the amounts involved, if you took all of it as pension would this affect your tax position and/or benefit entitlement?

Equally, taking some or all of the cash might take your savings over the threshold to make you ineligble for, or restrict other benefits to which you may otherwise have been entitled to (such as pension credit).

It's a topic that is often overlooked both in terms of retirement planning in general as well as at the very moment when a person decides to draw pension benefits.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

dunstonh · 8 May 2009 at 4:16PM

Is there a difference then between a purchased life annuity bought with the 25% and the lifetime annuity bought with the non withdrawn 75%?

Tax is the biggest difference. Lifetime annuities are subject to income tax but not all the income paid with a purchased life annuity is subject to income tax.

Also, you shouldnt rule out investing the 25% as some products can give a guaranteed for life 5% net return (and not impact on age allowance reduction for over 65s). The capital value may vary but on death the remaining value is paid out. Now, if the annuity cannot provide beat the equivalent of 5% net or you are close to age allowance reduction then investing can be the better option. Also, some people may have a risk profile that they prefer to invest and take the natural yield on investments and not worry too much about the capital value. Yields are quite high at the moment and could be another valid option.

Another one to consider is taking the 25% but reinvest £3600 a year (each if married) into an immediate vesting person pension. with current annuity rates that can give you an income of around 8-12% gross of your net contribution. It may take a few years to build up but think of that as way of providing indexation. That can potentially beat an indexed annuity.

These are all options that would really need to be costed and considered.

savingforoz · 9 May 2009 at 9:13AM

Thank you to Booradley for raising this question, as it is something that I've always wondered about.

Booradley_2 · 9 May 2009 at 2:54PM

Booradley wrote: »

Thanks dunstonh
Is there a difference then between a purchased life annuity bought with the 25% and the lifetime annuity bought with the non withdrawn 75%?

boo

Sorry Mike jones and Dunstonh
I have not understood your replies.
Dunstonh:
[Tax is the biggest difference. Lifetime annuities are subject to income tax but not all the income paid with a purchased life annuity is subject to income tax.]
What proportion or does it depend on individuals circs?
Also, you shouldnt rule out investing the 25% as some products can give a guaranteed for life 5% net return (and not impact on age allowance reduction for over 65s).
Got that bit!

[The capital value may vary]
because the providor is paying a fixed amount regardless what the fund is doing?

[Now, if the annuity cannot provide beat the equivalent of 5% net or you are close to age allowance reduction then investing can be the better option.]
The purchased life annuity(25%) or the lifetime annuity(bought with75%)

[Another one to consider is taking the 25% but reinvest £3600 a year (each if married) into an immediate vesting person pension. with current annuity rates that can give you an income of around 8-12% gross of your net contribution].
Never heard of this but at those rates it's gotta be good.

MikeJones
[Depending upon the amounts involved, if you took all of it as pension would this affect your tax position and/or benefit entitlement?]
I don't expect to be in receipt of benefits due to rent from a second property, savings and my wifes income (she is 16 years younger than me)

[Equally, taking some or all of the cash might take your savings over the threshold to make you ineligble for, or restrict other benefits to which you may otherwise have been entitled to (such as pension credit).]
Hoping to have 200k savings

Some facts for both of you.
Age 56 wife 41
When 65 will get projected state pension of £6500
Wife will be aged 50 and probably working part time.
Will have no mortgage and circa £200k savings in isas and BS accounts
Will have £5000 pa gross rent from second property.
Have Scot. Wid. contracted out PPP transfer value 30k
Have Stan. Life PPP Value of fund £50k
Have Stan. Life Retirement annuity contract value 4k
(No idea what this is. It appeared when I attempted to incease my pension plan contributions)

Boo
Thanks for taking the time

EdInvestor · 9 May 2009 at 3:12PM

If you add up all the projected income it comes to more or less 26,500. This will bust the old age allowance limits, unless a sizeable chunk of it is in ISAs.

So you would be best advised to move as much as possible into both your ISAs over the next 9 years, plus use things like NS&I tax free index linked certificates, where you can stash 15k a year each.You could also put the property in joint names so the income is shared if she has spare capacity on her allowance when you retire .

More taxable income from your pension would just compound your existing problem.

Note that wife's tax affairs are quite separate and won't impact yours.

Booradley_2 · 9 May 2009 at 3:39PM

80k will be in isas, more if the max allowance increases again. Not sure if the wife will have spare capacity, if she does, and becomes joint owner of the second property I take it that she claims to be in receipt of half the collected rents minus half of any costs associated with the property?
NS&I certs are pretty low paying accounts aren't they? And when they mature can you reinvest the whole amount tax free?

I know my wifes tax business is seperate but mentioned it in relation to any means tested benefits, as I assume means tested benefits (had I had less funds) would be the only benefits available.

What do you make of the fact that I have two products from Standard Life? I posted in another thread but didn't really get an answer.
Excerpt from thread:
I took out a pension with Standard Life through a small local broker 23 years ago. As my salary increased I increased my contributions every 2 or 3 years through the same broker. The broker retired and a junior partner took over. Next time I increased my pension paperwork from standard life doubled and I had two policy numbers.

I suspect that the new management of the brokerage firm sold me a complete new policy as there would be more commission involved.

EdInvestor · 9 May 2009 at 5:20PM

Booradley wrote: »

80k will be in isas, more if the max allowance increases again.

OK that will keep you out of clawback, just, as long as everything is tax free from on.[/quote]Not sure if the wife will have spare capacity, if she does, and becomes joint owner of the second property I take it that she claims to be in receipt of half the collected rents minus half of any costs associated with the property?[/quote]Yes and when you sell 2 CGT allowances can be claimed to offset against profits.

NS&I certs are pretty low paying accounts aren't they?

At the mioment because inflation is low.But then, so are most accounts.

And when they mature can you reinvest the whole amount tax free?

The whole of the capital, yes.

I know my wifes tax business is seperate but mentioned it in relation to any means tested benefits, as I assume means tested benefits (had I had less funds) would be the only benefits available.

You are well ahead of any means tested benefits.

What do you make of the fact that I have two products from Standard Life?I suspect that the new management of the brokerage firm sold me a complete new policy as there would be more commission involved.

It's possible, but it's equally possible that the reason was that the original plan had closed to new business and there was no alternative.

Booradley_2 · 9 May 2009 at 5:34PM

Thank you edinvestor. I'm learning a lot.

EdInvestor wrote: »

It's possible, but it's equally possible that the reason was that the original plan had closed to new business and there was no alternative.

The plan didn't close. I used to get one annual statement. I now get two. Each one shows contributions are still being made to both.

Lump sum. Why would you?

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