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  • FIRST POST
    • Liffy99
    • By Liffy99 16th Oct 16, 9:45 AM
    • 4Posts
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    Liffy99
    Take annuity or use savings
    • #1
    • 16th Oct 16, 9:45 AM
    Take annuity or use savings 16th Oct 16 at 9:45 AM
    I'm intending to retire 'early' at 60 (March 2107) but, given the appallingly low interest rates for savers I am wondering whether it is best to use my bank savings to supplement a small work pension (£14k) or take an annuity from my personal pension. It'll be another 6 years before I receive a state pension.
    The former would have few tax implications (a bit less interest to be taxed upon which would be negligible) whereas I'd lose 20% on the annuity straight away.
    Any thoughts ?
Page 1
    • worried jim
    • By worried jim 16th Oct 16, 9:53 AM
    • 7,691 Posts
    • 11,350 Thanks
    worried jim
    • #2
    • 16th Oct 16, 9:53 AM
    • #2
    • 16th Oct 16, 9:53 AM
    2107! You really are planning ahead!
    • xylophone
    • By xylophone 16th Oct 16, 12:10 PM
    • 19,205 Posts
    • 10,915 Thanks
    xylophone
    • #3
    • 16th Oct 16, 12:10 PM
    • #3
    • 16th Oct 16, 12:10 PM
    or take an annuity from my personal pension
    Why an annuity?
    • kidmugsy
    • By kidmugsy 16th Oct 16, 5:00 PM
    • 8,503 Posts
    • 5,475 Thanks
    kidmugsy
    • #4
    • 16th Oct 16, 5:00 PM
    • #4
    • 16th Oct 16, 5:00 PM
    You are much too young for an annuity to be good value. Unless interest rates, and therefore annuity rates, shoot up before March.
    • dunstonh
    • By dunstonh 16th Oct 16, 5:43 PM
    • 85,142 Posts
    • 50,154 Thanks
    dunstonh
    • #5
    • 16th Oct 16, 5:43 PM
    • #5
    • 16th Oct 16, 5:43 PM
    You are likely to have a phased income requirement. i.e. more now and less later when the state pension is paid. Have you factored that into your decision making?
    Why have you eliminated all the other options and chosen just from those two?
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • bigadaj
    • By bigadaj 16th Oct 16, 6:08 PM
    • 7,848 Posts
    • 4,789 Thanks
    bigadaj
    • #6
    • 16th Oct 16, 6:08 PM
    • #6
    • 16th Oct 16, 6:08 PM
    2107! You really are planning ahead!
    Originally posted by worried jim
    It's never too early, even when you don't plan to be born for another thirty years.
  • jamesd
    • #7
    • 16th Oct 16, 10:27 PM
    • #7
    • 16th Oct 16, 10:27 PM
    I'm intending to retire 'early' at 60 (March 2107) ... I am wondering whether it is best to use my bank savings to supplement a small work pension (£14k) or take an annuity from my personal pension. It'll be another 6 years before I receive a state pension.
    Originally posted by Liffy99
    Buying an annuity for that would be a horribly bad mistake for a few reasons:

    1. Your need is for quite rapid drawing for money to boost your income for the six years until you reach state pension age. A normal lifetime annuity would be providing an income for life so most of the money would be payable after the years when you need it.

    2. Annuities are poor value for income generation for those who are reasonably close to state pension age. You're a fair way away from that but your young age means annuity rates are poor anyway.

    3. You appear to be thinking that the only way to get money out of a pension is by buying an annuity since you're comparing pension annuity with non-pension savings. But it's been more than ten years now since buying an annuity ceased to be required and today flexible drawdown allows people to do things like taking the 25% tax free lump sum and leaving the rest invested, taking income from the rest as needed over the years. So these days it's easy to take higher income for the next six years then say defer your state pension and continue funding that with the money in drawdown.

    4. Deferring the state pension increases its value by 5.8% per year of deferral, inflation linked. It's usually the best deal available for an income guaranteed for life, paying more than twice as much as a comparable annuity would pay to a person in normal good health. enhanced annuities can occasionally pay more.

    given the appallingly low interest rates for savers
    Originally posted by Liffy99
    I'm not experiencing difficulties getting 10-12% from investments in P2P though.
    Last edited by jamesd; 16-10-2016 at 10:43 PM.
  • jamesd
    • #8
    • 16th Oct 16, 10:40 PM
    • #8
    • 16th Oct 16, 10:40 PM
    Is your small work pension a defined benefit pension like final or average salary or is it defined contribution with specific investments held just for you?

    Why do you think an annuity is required for your personal pension? Is it just not knowing that the rules changed or is there some special feature of it that bans doing anything else? Often providers will only give buying an annuity as a choice if that's the only choice they offer, without bothering to mention that you can transfer to get the full range of choices.

    While it's unlikely for a personal pension, assuming it was started after the year 2000 or so, it is worth checking whether there is a guaranteed annuity rate or other protected benefit from the personal pension. Those typically have a limited range of ages when they are available and could pay two or three times as much as an open market annuity today, sometimes even more than state pension deferral would pay. If there is one, age 60 is a fair candidate for when it would first become available and it might well be a good buy.

    Assuming what you have is typical the best choice would probably be something like this:

    1. Use your savings to make maximum permitted contributions into a pension while still working. The maximum is the lower of either your gross pay or £40,000 plus unused annual allowance from the past three years.

    2. Take a 25% tax free lump sum from the money purchase pensions and use this as part of the income base.

    3. Take enough from the personal pensions to use your personal allowance even if not needed yet, so none of it is wasted.

    4. Learn about P2P. The rates available from places like Ablrate and MoneyThing are impressive and not unrealistic, though you shouldn't plan on more than say 10% after allowing for bad debt.

    5. It may not be best to take your 14k work pension that I'll assume is defined benefit. This is because there is normally an actuarial reduction for taking it before the scheme's normal retirement age. If 60 is NRA then do take it. If it's older it's worth checking the reduction level to see if waiting might be a better move, supplementing with income from the personal pensions while not taking it.

    6. Use state pension deferral instead of annuity purchase if you want to increase your guaranteed for life income level.
    Last edited by jamesd; 16-10-2016 at 10:44 PM.
    • Liffy99
    • By Liffy99 17th Oct 16, 3:05 PM
    • 4 Posts
    • 0 Thanks
    Liffy99
    • #9
    • 17th Oct 16, 3:05 PM
    • #9
    • 17th Oct 16, 3:05 PM
    My work pension is final salary (NHS). NRA is 60 (where I am now).
    I've already added £25k to my personal pension pot this year.
    P2P - I'm already invested with several though rates are more like 3-4% (I'll check those others out, seem too good to be true). And I have other savings - enough to cover the 6 year wait until state retirement age.
    So I'll already be paying basic rate tax on income.
    Current pension provider does not offer any options such as drawdown - I'd have to move my personal pension elsewhere.
    That's why the question (lump sums aside) - if I were to take an annuity, and get taxed at 20% straight away, would it be better to leave the annuity invested for a few more years and use savings (where I'm lucky getting 1% or so) instead (eg draw out £5-6k a year). ?
    Thanks for all the really helpful info though.
  • jamesd
    Looks as though you're invested in some of the lowest paying P2P around, maybe through seeing the TV ads they used to get people to invest via them.

    There's currently at Ablrate a new loan for up to £1.42 million that will pay 14%, secured on the assets of a reycling and green power company, the Derwenthaugh Ecoparc. £720,000 was raised over the summer in an earlier loan as part of refinancing the funding used to buy the plant.

    That one is quite unusual and it's reflected in the 14% interest rate. Very different from the common property development deals that are just funding a new or upgraded building job, and with more risk than those, so definitely not one for a lot of your money, though maybe £1,000 might be interesting as part of a mixture including many other things.

    A fair bit of availability there on the secondary market, check the "yield" column when comparing, that's the effective interest rate per year. Not so much available on the secondary market at MoneyThing at the moment but they do have a fairly steady stream of new loans.

    Annuities start to become good value for money for those in normal good health around age 80-85. So yes, it would be a good idea to leave the money you might use to buy an annuity invested for as long as possible. Or at least until your state pension age, when you can use the money to fund living while deferring your state pension. The increase from state pension deferring is a good deal for those who want guaranteed for life income.

    Since your current provider doesn't offer drawdown you might want to ask whether they anticipate that changing soon and just get on with moving if they don't. The 25% tax free lump sum can generate useful ongoing income and while P2P isn't yet available inside an ISA from interesting places (it is from a few) that is expected to change over the next six months or so.
    Last edited by jamesd; 17-10-2016 at 10:29 PM.
    • singhini
    • By singhini 18th Oct 16, 1:49 PM
    • 85 Posts
    • 43 Thanks
    singhini

    2. Take a 25% tax free lump sum from the money purchase pensions and use this as part of the income base.

    3. Take enough from the personal pensions to use your personal allowance even if not needed yet, so none of it is wasted.
    Originally posted by jamesd


    Can I clarify the two points above please. I want to take early retirement when I turn 55 in July 2017. I have 4 pension pots with various company's and my intention in the next 4 months is to transfer them all into a SIPP and thus I will have one pot of cash in a SIPP and no other pension pots. I intend never to work again from the age of 55 (July 2017) and will have no income from any other source.

    so my question is:-

    Can I draw down 25% tax free on my 55th birthday (which is point one from your previous post). And then each subsequent tax year can I take out additional money to the value of the income tax free allowance i.e. £11,000 in the case for 2016/2017 (which is point two from your previous post).

    what I am trying to understand is if its possible to take all my pension tax free over the course of about 15 years i.e. draw 25% initially tax free and then the rest of the money also tax free aslong as I don't go over my personal allowance
    Last edited by singhini; 18-10-2016 at 2:01 PM.
    • bigadaj
    • By bigadaj 18th Oct 16, 6:30 PM
    • 7,848 Posts
    • 4,789 Thanks
    bigadaj
    Can I clarify the two points above please. I want to take early retirement when I turn 55 in July 2017. I have 4 pension pots with various company's and my intention in the next 4 months is to transfer them all into a SIPP and thus I will have one pot of cash in a SIPP and no other pension pots. I intend never to work again from the age of 55 (July 2017) and will have no income from any other source.

    so my question is:-

    Can I draw down 25% tax free on my 55th birthday (which is point one from your previous post). And then each subsequent tax year can I take out additional money to the value of the income tax free allowance i.e. £11,000 in the case for 2016/2017 (which is point two from your previous post).

    what I am trying to understand is if its possible to take all my pension tax free over the course of about 15 years i.e. draw 25% initially tax free and then the rest of the money also tax free aslong as I don't go over my personal allowance
    Originally posted by singhini
    The rules allow it, just need to make sure your chosen provider does, and if so what their charges would be for undertaking your wishes.
  • jamesd
    Can I draw down 25% tax free on my 55th birthday (which is point one from your previous post). And then each subsequent tax year can I take out additional money to the value of the income tax free allowance i.e. £11,000 in the case for 2016/2017 (which is point two from your previous post).
    Originally posted by singhini
    Yes.

    what I am trying to understand is if its possible to take all my pension tax free over the course of about 15 years i.e. draw 25% initially tax free and then the rest of the money also tax free aslong as I don't go over my personal allowance
    Originally posted by singhini
    Yes. Even if you needed more you could consider doing some VCT buying to eliminate the income tax cost.

    I want to take early retirement when I turn 55 in July 2017
    Originally posted by singhini
    Also run your plans through cFiresim with fees increased by 0.5% above default level to allow for the difference between UK and US investments (and maybe change the investment mixture as well) as a check on the viability of your planned income levels.

    You also have £720 a year of tax free money within your personal allowance available if you continue to make pension contributions at the 3600 gross a year limit for those with no eligible income. It's a nice use of savings or, within the limits for that, tax free lump sum money.
    • singhini
    • By singhini 19th Oct 16, 11:01 PM
    • 85 Posts
    • 43 Thanks
    singhini
    Thank you so much guys for your help, really appreciated.

    Knowing this information gives me hope with my pension money. I got an annual letter from one of my pension companies and it said something like "when you retire at your expected age of 65 your pot could possible be worth £150,000 and you could realise a pension of £5,000 a year"

    That's useless. I'm going to be 65 and get £5,000 PA (and the pots worth £150,000) Their bonkers

    I'm probably going to die by 75 (my mum died 66, dad 67 and sister was 45, what hope do I have).

    At least now, if the pot was say £100,000 when I turn 55, I can have 25% tax free (£25,000) and then lets say roughly £11,000 per year tax free which means the remaining £75,000 will run out in 7(ish) years

    Then I still have savings and the state pension and I can downsize my house to a camper van and live off the proceeds of the house sale.

    I don't understand why I would buy an annuity?
    Last edited by singhini; 19-10-2016 at 11:03 PM.
  • jamesd
    You'd buy an annuity because that's what people were traditionally forced to do and the annuity selling firms exploit people's ignorance of alternatives like state pension deferral to sell them still, even though the relevant regulations require them to act in the best interests of their customers. They simply turn a blind eye to the competition they know beats their product.

    That doesn't mean that you should never buy an annuity, though. There are times when they offer good value for money, just not to those in or close to normal good health around normal retirement ages. I fully expect to buy one ore more should I live long enough or be in sufficiently poor enough health that it makes sense for me.

    If you experiment with the tools like cfiresim that model sequence of return risk you'll find that having guaranteed income purchased at a sensible price can increase the safe withdrawal rate from the rest of the pot. That's well worth knowing and makes state pension deferral particularly attractive given that it also offers good value for money for those in or close to normal good health.

    The annual letters sent by pension firms have to use unrealistic assumptions, like purchasing a dual life inflation-linked annuity. Those give low income levels and very few people buy them. Well under half of what state pension deferral pays, maybe even under a third by now, if in normal good health.
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