A-day pension query

titewelshgit

Am I right in assuming that post A-day those over 50 can take a lump sum WITHOUT drawing an income. I have various pensions and this seems too good an opportunity to miss if true, as this was a big drawback to me as I did not want to draw an income I would be taxed on. What happens to the income you don't take - does this accrue to your actual retirement age?
Any advice would be most appreciated.

claretmatt

Yes your right post A-day you will be able to take your tfc without taking income.

The income will remain invested in your pension pot and you can draw income on an ad-hoc basis up to a maximum which is calculated by the Government actuaries.

It is important to note that there will be a risk with the remaining monies invested and there is also impact of mortality drag to be considered. Annuity rates are based on the life expectancy of the member, whether they buy a purchase life annuity or a pension annuity. Those that live longer than others will over time receive their original pension fund value plus interest. Some members will die without receiving even their original fund value. This results in a mortality profit of which surviving annuitants will benefit with higher annuity as a result of cross subsidy.

If the pension scheme member at retirement age chooses drawdown rather than an annuity, the member will not benefit from the mortality profit and thereby creating a mortality risk. To compensate for this loss of mortality subsidy, pension drawdown will have to achieve an extra investment return. This also applies to anyone that chooses to delay purchasing an annuity in the hope that the rates will improve in the future, resulting in a cost of delay.

The Financial Services Authority (FSA) estimate that at age 60 the extra return required is 1% but by 75 it could be as high as 4%. This will result in a mortality drag and is effectively a loss against the investment return as a result of the member deferring the purchase of an annuity.

Finally it will probably cost more to manage these products as they do need to be reviewed on a annual basis.

Also if you are deliberately deferring taking income for IHT purposes then HM C&E will place a tax on the remaining fund. Deferring the income for income tax purposes and because you don't need it is viable, but you may have to get an IFA / accountant to document this

titewelshgit

claretmatt
Doesn't the risk you quote in your 3rd paragraph still apply whether you take a lump sum or not??? Excuse my ignorance in such matters!!

claretmatt

It does specifically relate to the income proportion of the pension pot and not the drawdown element, which will generally be 25% of the pot.

Remember to take into account the increase in age allowance at 65, where you can take more income tax free and also remember that ISA and bond income do not affect your age allowance.

EdInvestor

claretmatt wrote:

It does specifically relate to the income proportion of the pension pot and not the drawdown element, which will generally be 25% of the pot.

Just to clarify, you can take 25% in tax free cash,which most people then reinvest in ISAs or whatever from age 50.

THe other 75% is to provide your pension income later on, which can be taken any time, either via an annuity ( where you give your fund to an insurance company in return for a guaranteed income for life) or via an income drawdown plan, where you leave the money invested and take an income from it.This is where mortality drag might have an effect, so it is very important to keep costs as low as possible when doing drawdown.

whiteflag_3

EdInvestor wrote:

Just to clarify, you can take 25% in tax free cash,which most people then reinvest in ISAs or whatever from age 50.

Do they , can you provide the stats - in my experience ( real life as an IFA )they spend it on a cruise/conservatory etc.

This is where mortality drag might have an effect, so it is very important to keep costs as low as possible when doing drawdown.[/QUOTE

]

Why is mortlity drag only a possibilty ?

I thought you advocated getting the best fund was the priority - not charges?

exil

Mortality drag - sounds like those chains on Marley's ghost!

Anyway - do I take it you can

- take out 25%
- draw down from the remaining 75% an amount equivalent to (I think) 120% of the annuity rate?

EdInvestor

exil wrote:

Anyway - do I take it you can
- take out 25%
- draw down from the remaining 75% an amount equivalent to (I think) 120% of the annuity rate?

Yep. You can work out exactly what you will get using the tables here:

http://www.hmrc.gov.uk/pensionschemes/gad-tables.htm

Take the amount of the fund, your age and the relevant gilt yield ( it's 4% at the moment), find the GAD factor, and then multiply by 120%.

exil

Hmmm. looks like with gilts at 4% I could take out about 6% (ie 5%*120%) at age 50 while 70 yr old Mum could take out 8 1/2%.

I estimate I'd run out of capital in about 32 years whilst Mum would spend her last cent in about 18.

And yet - according to the fsa, the best annuity rate I could expect at 50 is 4%,
at 70 (female) 6%.

Is there a catch - specifically, I imagine it would be that gilts rates could go down in future causing you to eat into your capital too quickly using drawdown. And since that
would cause annuity rates to drop as well it would not help very much to call a halt and take out an annuity at that stage. I suppose it's a gigantic bet based on how annuity rates are going to move and how long you expect to live!

Be_Happy

Think I understand this correctly, but can anyone confirm if the following is feasible.

Pension fund = £40,000 at age 60 take £10,000 and leave balance growing (hopefully!) in fund. Invest £10,000 to draw monthly income (1/60th) until used up at age 65, then take annuity with balance of fund. Annuity will be based on age 65, therefore higher than would have been at age 60, although based on only 75% of fund).

[Deleted User]

You should find these calculation tools useful OP

http://www.sippdeal.co.uk/calculation.aspx