Pension fund £16000 to pay just £480 per yr

philng

My wife has a pension fund value £16735 & has been quoted just £480 pa pension on joint life at age 50 retirement. I calculate this to be just 2.8% of the pot each year. This would easily be obtainable from a savings account so effectively they are just paying the interest on the pot without any return of capital. How can this be right? If this is correct it makes a mockery of pension saving. Albeit she has only paid in around £4000 of this pot (rest being employer contribution).

dunstonh

This would easily be obtainable from a savings account so effectively they are just paying the interest on the pot without any return of capital. How can this be right

Its because she is aged 50 and anyone taking an annuity at 50 either needs their head checking or has enough money to not care and wants absolute security.

However, you are not comparing like for like. Average rates at the moment show aged 50 female on single life basis is 5.34%. currently and 2.69% for RPI linking. 2.50% with RPI and 2/3 spouse..... There are other variations as well which could easily get that figure.

So, it looks like you have some indexation in that figure. Savings rates dont have that.

If this is correct it makes a mockery of pension saving.

Why? Savings rates dont increase by inflation. The annuity you are looking at appears to do so. So, whilst interest rates will move within a typically narrow band, the income on the annuity will be going up each year for the next 30 or so years. Initially its not as good as savings but it will pass it at some point.

Why is she looking to buy an annuity at aged 50? The pot isnt very big now. It probably isnt going to make much of an impact on your living standards now (assumption I know but unlikely). It is probably better worth waiting until she gets to 60 when 65 when annuity rates are much higher and the fund value higher as well.

philng

She works for a major bank & has other pensions from previous employers including a previous final salary. If she wants to finish working now she either has to retire or resign. If she retires it is a condition that she draws her bank pension. If she resigns she will lose some of her shares held in a monthly SIP Share scheme & the remainder of the shares held in this scheme I believe would be taxable. The income from the annuity is on an index linked basis & the amount is immaterial to us due to my income & other investments held.

I calculate the lost shares would amount to about £1000 + any other tax cost on the other shares.

I would prefer to leave the pension till age 60 but dont want to lose the shares.

What do you think would be the best option?

Richard_DandR

If she is planning to retire before the Company's normal retirement age, she would be liable to tax and NI on the contributions for at least some of the SIP shares.

http://www.hmrc.gov.uk/shareschemes/share_incentive/sip-guide-employers-advisors.pdf

There is generally no liability to income tax or NICS on shares withdrawn from a plan when a participant ceases employment with the company as an involuntary leaver, due to:
• injury
• disability
• redundancy
• TUPE transfer
• change in control of the subsidiary employing company
• retirement on or after the age specified in the plan
• death (S498)

jamesd

philng, it sounds as though this money is held in a money purchase pension. That would mean that she would normally be able to transfer the pension pot to another pension provider. Then she could avoid taking any pension benefits at all, just leaving the money to grow.

If she did want to start taking benefits just to avoid being forced to wait until 55 after April then she could transfer, take 25% tax-free lump sum and leave the remaining 75% invested in income drawdown, not taking any income from it. the 25% could be invested within a stocks and shares ISA. This gets her retired, with no ending of investment growth and no need to take a poor value annuity. And the pension pot can be inherited by you if she was to die, with no need to lose some of her own income as she would if she bought a joint life annuity.

Even if she wanted to take an annuity she should visit unbiased.co.uk to find an IFA who can shop around for the best deal for her using the open market option for annuities. There's an excellent chance that the annuity rate would be better than the one she's getting quoted now.

As for annuity options, she probably doesn't need a joint life annuity because it seems that your own pension would probably be more than adequate for your own needs after her death.

From the sound of it transferring then using income drawdown and taking no income is the best way to go, since you don't need the income.

philng

Thanks but she has been told in order to retire she has to draw her money pension scheme. The only alternative is to resign & leave the pension invested but she would lose some shares from the SIP scheme & have some tax and ni liability on the others.

dunstonh

Drawing the pension doesnt necessarily mean having to buy an annuity.

jamesd

philng, it doesn't sound normal. Even a final salary pension could be transferred, let alone something with money purchase. Something doesn't seem to add up here and you'll need to find out why. It may simply be ignorance of all the options on the part of the people she's talking with.

markr007

European portability directive means a transfer is always an option. To do this though she would have to leave the scheme. Therefore suggest she could:

1. Opt out of scheme
2. Transfer it out
3. Retire form employment

Just a thought.

marklv

philng wrote: »

My wife has a pension fund value £16735 & has been quoted just £480 pa pension on joint life at age 50 retirement. I calculate this to be just 2.8% of the pot each year. This would easily be obtainable from a savings account so effectively they are just paying the interest on the pot without any return of capital. How can this be right? If this is correct it makes a mockery of pension saving. Albeit she has only paid in around £4000 of this pot (rest being employer contribution).

Pension funds are not designed to provide a living for middle aged people who fancy dropping out of the labour market. Taking retirement before at least age 60 is likely to be very expensive - this is a fact.

philng

How would she go about drawing the pension without buying an annuity?

In the ideal world we would want to leave the pension invested & draw later but at the same time retire rather than resign in order that she doesnt lose any of her SIp shares or suffer any tax on the others.

She does have other money purchase pensions from previous employment. Could she transfer the fund to one of these? and would that be advisable?