GAR pensions

Terron · 23 May 2017 at 10:28AM

I am looking to start taking at least some of my pensions in 2 years time when I am 60. I have been talking to a pension advisor, but am doubting some of his advice.

I have 6 pensions. Three he advised leaving alone - the final salary one and its AVC one, and one with a final salary underpin. Then there is a defined contribution one which is being transferred so it can be used for drawdown. Those seem fine.

The other two are ones I took out in the 80s. They are with profit schemes with a Guaranteed Annuity Rate of 10.6% if I take them at 60. He advised merging them into the drawdown scheme. But the rate seems too good to give up. It looks like I mught be betteer off making extra contributions rather than taking money out of those schemes.

These are my two smallest funds. They were taken out with Norwich Union in 1985. One was a lump sum, the other regular pay,ments which I stopped when I moved to a job with a company scheme.

I am unmarried and have no dependants so the basic annuity would be OK.

What should I be looking at.

DaveMcG · 23 May 2017 at 10:51AM

Certainly the GAR seems an excellent rate and if you have no dependents, there isn't really much of a case for giving it up.

As to making more contributions, you should check that the GAR will apply to these as it might not.

dunstonh · 23 May 2017 at 11:10AM

The other two are ones I took out in the 80s. They are with profit schemes with a Guaranteed Annuity Rate of 10.6% if I take them at 60. He advised merging them into the drawdown scheme. But the rate seems too good to give up. It looks like I mught be betteer off making extra contributions rather than taking money out of those schemes.

These are my two smallest funds.

How small? Small enough to be an unwanted hassle or big enough to be worthwhile?

Why has the adviser said the GAR shouldn't be used and placed into drawdown?

agarnett · 23 May 2017 at 11:41AM

For the moment at least, never mind how small they are right now, but re those NU WP schemes with GARs - do the terms and conditions of either or both allow you to stuff them full of new contributions before age 60? (subject to the caveat DaveMcG mentioned whereby perhaps the GARs won't apply to new contributions or transfers in ...).

And do they also allow transfers in e.g. of the DC plan that currently seems strangely destined for some new drawdown scheme introduced by the advisor (if I read you correctly)?

Terron · 23 May 2017 at 12:06PM

Thanks.

The lump sum policy says under Additional Premiums
The Policyholder may at any time and from time to time, before the Benefit Date (or any substituted Benefit Date) pay further sums to the Society by way of premiums.

There are a couple of conditions which seem to boil down to the scheme being approved by the government and me being liable to tax on relevant earnings .

The regular payment one allows for the payment of an additional years premium on the anniversary of the commencement date.

dunstonh · 23 May 2017 at 12:16PM

Whilst the policy document at the time of issue may say that, it does not mean you can. A very small number of S226 RACs can increase their regular contribution because of a contractual event (such as indexation or restarting if on payment holiday. Mmost cannot add to them.

S226 RACs were abolished in 1988 as a tax wrapper for new business apart from those that were already paying into them on a regular basis.

atush · 23 May 2017 at 12:24PM

I am concerned the IFA said to transfer these GARs. As you have no one to leave the money to (and I assume you are of good health) I can't see a reason to give up on over 10% income w/o any risk

agarnett · 23 May 2017 at 12:24PM

dunstonh wrote: »

Whilst the policy document at the time of issue may say that, it does not mean you can.

Can you explain how a policy document at the time of issue which is by its very nature a contract of "long-term business" with an insurance company and is not an annually renewable contract, can ever cease to be a contract that does what it says on the original can, unless the punter agrees to a change?

As a seller in the late 70s for a very large UK insurance company whose main corporate colour was Arsenal red as opposed to the Chelsea blue of Norwich Union, I would be horrified to learn that my short foray into selling S226 pension policies to self-employed peeps before April 5 each year as support to the Life and Pensions side of the company resulted in pensions that long after I sold them in good faith, ceased to do what I sold as a contract.

Please tell us it isn't so.

Never mind that S226 were abolished for new business (unless you are saying that further contributions into existing policies were redefined as "new business" by a 1988 Finance Act?)

Terron · 23 May 2017 at 1:01PM

The transfer value of the NU pensions (now with Aviva) is about £25k.

The reasons given by the advisor are that I will have a highenough income to meet my base needs without it and

Take advantage of the flexibility of income options under the new pension reform rules, and the ability to take more income earlier in your retirement than your GAR allows. Once the GAR has been taken, under current legislation it is not possible to reverse this decision
The ability to access your tax free cash without taking income
Access your tax free cash without taking income and at the maximum regulatory level of 25% of fund value.
Take advantage of improved death benefits.

The peson that has been tranferred to a SIPP was about 300k. It offered reduced costs to employees, which I no longer am.

I currently make about £24k from properties I let. The DB pensions should be about £14k. They would push me above the HRT threshold in 2020/21 because of the change in how mortgages aree taxed, so I plan to sell a property (a former home) in 2019/20 and pay off some mortgages to avoid that. That should have an approcimately neutral effect with the lost income cancelled out by the reduced payments. I would probably use some of the tax free lump sum to further pay down the mortgages in my own name.

I believe my pension contributions would be limited to £3,600 a year.

I am not bothered about the death benefits.

dunstonh · 23 May 2017 at 1:22PM

So, the income, if taken via the GAR annuity would be taxed at 40%? Would that still be the case when you sell the property and take the GAR (I know you say it will be when you sell but dont mention if the GAR, if taken, would keep you at higher rate)

Is the property sale a genuine objective or one of those things you plan to do but may end not getting around to it?

Does the GAR increase at later ages if delayed? i.e. if you dont need the income now, will it head to say 15% GAR at 65 if you defer taking it (along with increased fund value through growth)?

Lots of questions and unknowns and the above are just a few. If you were going to be a higher rate taxpayer throughout retirement then the GAR does clearly lose value but if basic rate later on, is likely then a double digit GAR is very attractive as the breakeven point is very early.

agarnett · 23 May 2017 at 1:39PM

Just to check - the approximate transfer value you have mentioned (c.£25,000) of your W-P Aviva pensions is an official transfer value? Can you confirm that it is not a combination of two values you or your adviser have found in your two annual certificates stating current 'fund value'?

In W-P, transfer and fund value can be very different. On one Aviva W-P policy I hold (was also NU but is unitised W-P not conventional W-P and is perhaps 20 years newer than yours) the Transfer value is some 65% higher than the 'fund value' reported annually each year now, in a hopelessly misleading certificate.

When you bought your 1980s policies, it is likely there would have been little or no mention of "terminal bonus" or "final bonus". Those started to appear in bulk only towards the end of that decade. W-P was designed to receive annual regular or 'reversionary' bonus which could not be removed once added. Insurance companies eventually all started reducing regular bonuses and even removing them entirely such that fund values appeared to start stagnating. The insurance companies instead gave themselves the luxury option of adding a non-guaranteed final bonus instead. Some of these final bonuses have become very large compared to underlying stated fund values.

GAR pensions

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