What to do with pension lump sum

jamesd

Orwell, OK, you want 2k extra income. Who is responsible for paying it, the pension scheme of the employer or an insurance company? Anything to gain by buying an annuity from a third party to avoid a link to the employer's future? Also worth asking an IFA to price out your options since they may find a better deal for a non-compulsory annuity like this.

It's also worth considering whether income drawdown on it would do the job for you. One initial advantage of drawdown is that it is 100% inheritable by a wife, no reduction to 66% (applies regardless of whether it's inside or outside a pension). You shouldn't have trouble drawing 6% without losing capital over the long term and 5% is achievable without use of capital at present from a mixture of equity income and bond funds. This sort of mixture should beat inflation as well as providing long term growth if you only match the 4% plus inflation, since that's not a difficult target.

Maybe do the drawdown and buy an immediate vesting personal pension for each of you each year at the 3600 gross limit once you each reach 55, so you start to get the better annuity rates that are available as you get older.

Via an IFA you can buy a structured product from Arc that pays 7% for five(?) years with capital guarantee down to 50% drop in FTSE value. Could by enough of that to match the 4% income and invest the rest. Another provider would pay 6% so you could diversify while still taking 4% and investing much of the money.

EdInvestor

Orwell wrote: »

My conclusion is to do a bit of each - take £2k extra income and £50k lump sum. That kind of covers my bases and means I can't make totally the wrong choice at least!

This is better than taking it all as pension, at least you will have 70k as capital

If allowed, I would also suggest you consider income drawdown rather than an annuity for the other half, not least because you don't have to take any income from the plan - thus the fund value can build up for use later, or as an extra lump sum for your wife if you die before her.

Inexpensive drawdown providers are

https://www.sippdeal.co.uk
https://www.h-l.co.uk

Drawdown funds can be kept in cash or gilts if desired,so need not incur any market risk.

Orwell

jamesd wrote: »

Orwell, OK, you want 2k extra income. Who is responsible for paying it, the pension scheme of the employer or an insurance company?

The pension scheme of the employer (which just so happens to be a large UK insurer whose FS scheme is still in surplus).

I was wondering if a purchased annuity would be better value - it is hard to get online quotes for these though.

Not sure I understand what income drawdown is. Surely if I am not converting it to a lifetime income I might as well take it out tax free?

dunstonh

Via an IFA you can buy a structured product from Arc that pays 7% for five(?) years with capital guarantee down to 50% drop in FTSE value. Could by enough of that to match the 4% income and invest the rest. Another provider would pay 6% so you could diversify while still taking 4% and investing much of the money.

It is 5 years and it is SIPPable.

I was wondering if a purchased annuity would be better value - it is hard to get online quotes for these though.

Purchased life quotes have virtually no coverage on line. Lifetime annuities dont either with many of the companies only transacting through IFAs.

Not sure I understand what income drawdown is.

It allows you to take 25% and an income (or no income until later if you prefer) and remain invested.

EdInvestor

dunstonh wrote: »

It allows you to take 25% and an income (or no income until later if you prefer) and remain invested.

Plus you don;t lose the capital as you do with an annuity- it can be left to heirs minus 35% tax outside your estate.

Jennifer_Jane

EdInvestor - with the drawdown, is it that the capital is converted into units and then you sell whatever units you need to in order to get an income?

If it is, then my South African pension is like that, it means that every year when I take my income, units get sold, so my capital is being eroded. I am seriously considering converting my 'Living annuity' as it is called to an ordinary annuity (once the markets have recovered).

Thanks
Jen
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EdInvestor

Jennifer_Jane wrote: »

EdInvestor - with the drawdown, is it that the capital is converted into units and then you sell whatever units you need to in order to get an income?

No.With a drawdown you can invest in a wide range of different assets.For instance you could put some money in shares which pay dividends, some in cash which pays interest, and some in gilts (Govt bonds)which also pay interest.This provides a natural income which you can take without spending your capital.In the case of the equities of course you would hope that the value of the capital had risen.

The maximum amount you can take from a drawdown is however at 120% of the annuity rate, so may be as high as 10% for older people.It's very difficult to get that level of return through income alone, so if taking the max, such investors will probably be cashing in assets.Whether or not that erodes their capital depends on how their investments have performed.

A drawdown is very flexible though, so if you want to avoid capital erosion, you can adjust the income level you take downwards in poor years ,or still take the max but reinvest a part of it outside the drawdown (in an ISA perhaps)..

dunstonh

Plus you don;t lose the capital as you do with an annuity- it can be left to heirs minus 35% tax outside your estate.

You are giving up (or postponing) a guaranteed income for life in exchange for investment returns which may not be sufficient to pay the same income later in life. Personally, I prefer drawdown but it comes with risks.

Orwell

I am surprised no-one has suggesting bunging the lot (+ a mortgage) into a BLT property which "should" protect against inflation and provide an income in future years when I would most need it. No doubt BLT is being hotly debated elsewhere on the site.

Possibly buying a flat as a student residence for the kids might make sense.

Jennifer_Jane

EdInvestor wrote: »

No.With a drawdown you can invest in a wide range of different assets.For instance you could put some money in shares which pay dividends, some in cash which pays interest, and some in gilts (Govt bonds)which also pay interest.This provides a natural income which you can take without spending your capital.In the case of the equities of course you would hope that the value of the capital had risen.

The maximum amount you can take from a drawdown is however at 120% of the annuity rate, so may be as high as 10% for older people.It's very difficult to get that level of return through income alone, so if taking the max, such investors will probably be cashing in assets.Whether or not that erodes their capital depends on how their investments have performed.

A drawdown is very flexible though, so if you want to avoid capital erosion, you can adjust the income level you take downwards in poor years ,or still take the max but reinvest a part of it outside the drawdown (in an ISA perhaps)..

So you can choose to just take the interest rather than income (ie selling units)?

Then that's the big difference, because my three pensions are in two different risk funds with a mix of products, but you cannot isolate where the income comes from - you take between 5% to 20% of the fund value. Essentially it's just like any unit trust fund, although there are Government regulations about the funds. It was sold to me as a good way to get money out of Country because if you took 20% of the fund every year, then the fund would be depleted after 5 years (pretty much). It's a complicated arrangement for people who are getting older and wanting to simplify their financial arrangements. I am taking 5% now whilst the markets are down, and am glad I am not relying on that for my livelihood (still means selling units though).

Jen
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