Over 60 - need to consolidate pension pots

usignuolo

My sister has recently turned 60 and has three small private pensions pots which amount in total to around £40,000 and so cannot be cashed in. She is not currently working and otherwise only has state pension and some savings. So she needs to make best use of these pension pots.

Can she consolidate them by transferring them into a SIPP or similar or is this option only available before reaching retirement age.

EdInvestor

Yes she can.I assume her aim will then be to put them into income drawdown?

usignuolo

Yes into something called I think a USP although we are not sure how that works. Is there a good online guide?

EdInvestor

http://www.pensionsadvisoryservice.org.uk/Personal_and_Stakeholder_Pensions/Income_Drawdown/

MiloH

It's worth noting the comment under "What sort of fund size do I need?" with the answer of a minimum £100K+. As your sister will be relying on these pension funds it would be a serious gamble to invest in drawdown.

Before consolidating pensions you need to be sure that you are not throwing away valuable guarantees on existing plans. If any of the pensions are in With Profits you need to understand and weigh up the value of the guaranteed basic sum, bonuses to date, any guaranteed bonus rate and any guaranteed annuity rate.

A good starting point for assessing retirement options is the FSA's guide. If you type in the words FSA guide retirement options into google and click the first link you'll find it.

McKneff

just curiosity, why doesnt she, if she is 60, just take the 25% lump sum she is entitled to take and then the 3 pensions from the rest.

EdInvestor

MiloH wrote: »

As your sister will be relying on these pension funds it would be a serious gamble to invest in drawdown.

Not necessarily.That depends on what she invests the money in and how much income she takes.

MiloH

EdInvestor wrote: »

Not necessarily.That depends on what she invests the money in and how much income she takes.

Most people who invest in drawdown choose to buy an annuity before age 75 rather than enter Alternatively Secured Pension. By taking out a drawdown plan you are therefore effectively delaying buying an annuity and therefore need to consider mortality drag.

Wiki's current definition for mortality drag is as follows: "Mortality drag is a term used, in reference to life time annuities, to describe a negative impact that is experienced when an annuity purchase is delayed on a fund from which regular withdrawals are being taken by an individual. It is the increasing risk of falling annuity rates, and grows exponentially as an individual continues to defer an annuity purchase. In practical terms it represents the extra investment return a customer has to achieve to justify not annuitising a pension fund."

That's a pretty complicated concept to explain on a message board, but it comes about because part of the income she will get from buying an annuity as a 60 year old includes an element of cross-subsidy from people in the annuity pool dying young. By waiting until 75 this cross subsidy is reduced because you've missed out on the young deaths.

The nub of it is that you have to generate a sufficient investment return in order to be able to draw an income from the annuity at 75 equivalent to that which would have been generated through purchasing an annuity at outset. This rate of return is expressed by the critical yield on the illustration, and is typically a rate of return that requires a fairly ballsy asset mix.

In other words if she goes into something low risk it's likely to generate a low return and by the time she buys an annuity the remaining fund will be so low that the annuity will be less than she would have had if she'd bought an annuity from the start. She could counter that by taking a low level of income but it looks like she will be reliant on the income so maybe doesn't really want to have a low amount, and why take an investment risk and a low level of income just to get a low annuity at 75?

Drawdown has a place where someone has significant other assets that could be called upon if the drawdown goes pear shaped, or where the pension is big enough to begin with that even if it reduces significantly there's still enough left to get by. Or maybe someone wants the lump sum but doesn't want a pension income because they are still working. The saver also needs to have at least a moderate attitude to investment risk (maybe cautious to mnoderate if considering a "third way" pension) and possibly a desire to leave a pension fund behind in the event of early death.

EdInvestor

MiloH wrote: »

part of the income she will get from buying an annuity as a 60 year old includes an element of cross-subsidy from people in the annuity pool dying young.

These people are these days buying impaired life annuities so are no longer in the 'pool', one reason annuities are increasingly poor value.

The nub of it is that you have to generate a sufficient investment return in order to be able to draw an income from the annuity at 75 equivalent to that which would have been generated through purchasing an annuity at outset.

Of course due to age the 75 year old will need a smaller pot to buy the same level of annuity as the 60 year old.One of the major points about drawdown is that it enables you to take more income when younger and able to enjoy it, rather than a level amount throughout.

..and possibly a desire to leave a pension fund behind in the event of early death.

Indeed so, the complete loss of the pension fund for a very ordinary return is one of the major downsides to annuities.

In the case of this particular lady, by the time she gets to 75 the income from her index linked guaranteed pensions is likely to be well ahead of her drawdown/annuity anyway on inflation grounds alone.

MiloH

EdInvestor wrote: »

These people are these days buying impaired life annuities so are no longer in the 'pool', one reason annuities are increasingly poor value.

I agree that some of these people are self-selecting themselves out of the pool but I'm sure you'll agree that;
a) not everyone with impaired life expectancy will buy an impaired life annuity due to lack of knowledge of the product, and
b) some early deaths will be from people in good health at the time of purchasing the annuity.
Impaired life annuities will have an increasing impact on retirement planning in the future, but right now mortality drag remains alive and well.

EdInvestor wrote: »

Of course due to age the 75 year old will need a smaller pot to buy the same level of annuity as the 60 year old.

Yes, but that's only one part of the equation. It's like saying 2 + 2 + 3 = 4, because that's what 2 + 2 equal. Mortality drag still has an affect. You still need to beat the critical yield (which factors in mortality drag) so you still need to invest in volatile assets capable of getting the required return.

EdInvestor

MiloH wrote: »

You still need to beat the critical yield (which factors in mortality drag) so you still need to invest in volatile assets capable of getting the required return.

Only if your income at 75 is your major concern, which I would suggest is not the case with many people wishing to do drawdown.