Take the Annuity and Run...?

nigelF

I’m rapidly approaching the big five-O - where did it go?

My partner and I are moving abroad in January. We don’t own a property in the UK but we own a house and have a mortage in Portugal. We have been living in accommodation through my partners’ work for the last fourteen years. I have had a pension with the Pru since I was 20 but when the doom and gloom about pensions started a number of years ago, I decided to stop paying into the pension and bought the house in Portugal. I have a few other savings, likewise my partner has a small pension and an ISA.

We both intend to carry on working, albeit for a lot less money but the lifestyle should compensate and my partner will continue her pension. I don’t really want to start paying into my pension again as all my cash will be tied up in the day to day stuff and I haven’t got a lot of confidence in the market anyway.

The Pru have offered a lump sum of £27k and £4,600 per annum if I take my pension at 50. The cash would help pay for another plot of land I have my eye on and the small annual income will pay part of our existing mortgage.

I’m now prepared to be hauled over the coals by you guys and gals but would like to know what fatal flaws you may see in my plan for the good life, because If it’s left to me, I’d take the money and run for the sun...

Thanks, in anticipation...

dunstonh

I have had a pension with the Pru since I was 20 but when the doom and gloom about pensions started a number of years ago, I decided to stop paying into the pension

There is no doom and gloom about pensions. After all, a pension is just a tax wrapper. It doesnt make or lose money.

. I don’t really want to start paying into my pension again as all my cash will be tied up in the day to day stuff and I haven’t got a lot of confidence in the market anyway.

A pension doesnt need to invest in any market, let alone a stockmarket.

I’m now prepared to be hauled over the coals by you guys and gals but would like to know what fatal flaws you may see in my plan for the good life, because If it’s left to me, I’d take the money and run for the sun...

By taking the funds out of the pension, you are commencing an annuity at age 50 when annuity rates are very poor. The pension has tax free growth and whilst Pru may not have the best fund range going, they charge no penalty to move it to someone that does. In rarer cases, they did offer some guaranteed annuity rates as well and yours could have those.

You are making the mistake in believing what the media say is correct. Pensions are not doom and gloom. Certain funds are but with a choice of thousands and modern plans being much more flexible, you shouldnt cut and run from the pension based on a misconception of how they work.

Next thing is that you shouldnt put all your assets into property. We are overdue a price crash. Doesn't mean it will happen but do not think that property is all one way growth and less risky than a decent portfolio within a pension. It isnt.

Whilst you wouldnt necessarily go adding to it anymore, you should proceed with caution about crystallising what you have.

EdInvestor

IMHO this is the kind of situation where a low cost SIPP comes into its own, enabling the investor to take the 25% tax free cash lump sum, while keeping the rest of the fund invested and taking a flexible income (which can be higher than annuity rates if desired) at the same time.

The investor can minimise costs using the new low cost Sipps (which can be cheaper than a traditional lifeco policy). This is important if he is hoping to grow his fund so as to get a higher pension in the long term, while also taking an income now.

As long as he has access to the internet, there is no problem running a Sipp in "phased drawdown" (as the above is called) from overseas.

The two best providers to look at are

https://www.sippdealextra.co.uk
https://www.hargreaveslansdown.co.uk [not sure if they do phased drawdown yet.It's important to choose the phased option as it is much more flexible on income levels.]

Obviously there is some risk in leaving the fund invested, but this must be balanced by the fact that if he takes the annuity now it will have only half the spending power in 20 years that it has now ( and that assumes current UK rates of inflation) when he will be only 70, with possibly more than another 20 years to go before he pops his clogs.

A couple of other comments Nigel

You don't seem to have much in the way of resources backing you up.I would thus suggest caution in ploughing the tax free cash into more property in Portugal which may be diffult to resell for the same price ( much less a profit!). Suggest you keep it as liquid savings earning as high an interest rate as possible.It's really important to have an emergency fund when living abroad.

I would also strongly suggest that both of you take advantage of one of the great bargains available for expats and sign up for the very cheap voluntary class 3 contributions to the state pension, only around 7-8 pounds a month.The index linked state pension would cost you 100k to buy on the open market these days, and you can imagine how much you would have to put away per month to build up a fund that size in 15 years. A hell of a lot more than 8 quid a month!

margaretclare

Also, at 50 you're a spring chicken. You could have another 'big 50' in half-a-century's time!

Great advice you've been given here. I can only add - the decisions you make now, possibly based on wrong preconceptions as your post shows, can affect you for a very long time.

Changes this April mean that you do not HAVE to take an annuity. You say you have little faith in 'the market'. If I were in your shoes I'd have even less faith in buying land in another country, or at least not without another solid UK portfolio behind me 'in case things go wrong'.

Margaret Clare

nigelF

Thanks folks. I knew it was a good idea to post this up. The land investment was actually to build another house for myself rather than an 'investment'. Thanks EdInvestor for the SIPP info and the voluntary class 3 contribution - who should I contact for one of these? I like being a spring chicken Margaret, thanks. I realise I don't have to take annuity - it was a way of releasing some cash...but maybe not now! Cheers, Nigel

EdInvestor

HMRC Centre for Non residents is here:

http://www.hmrc.gov.uk/cnr/index.htm

margaretclare

nigelF wrote:

Thanks folks. I knew it was a good idea to post this up. The land investment was actually to build another house for myself rather than an 'investment'. Thanks EdInvestor for the SIPP info and the voluntary class 3 contribution - who should I contact for one of these? I like being a spring chicken Margaret, thanks. I realise I don't have to take annuity - it was a way of releasing some cash...but maybe not now! Cheers, Nigel

Hi Nigel

But you could still get the 25% tax-free cash sum from a SIPP, as Ed points out! What you'd need to do is to request the Pru to transfer the whole fund to one of the SIPP providers above.

I did this recently with my stakeholder 'pot' from Friends Provident. It took them a while to get their head around it, notwithstanding all the information they'd received about 'A' Day! Also they found it hard to understand that a wrinkly like me was more 'au fait' with the changes and did NOT want (another) annuity. Eventually, after a lot of to-and-fro, my pot was transferred to Hargreaves Lansdown. I can take my 25% tax-free from it at any time before my 75th birthday in 4 years' time, but at the moment I don't need the money so it can stay where it is.

Best wishes

Margaret Clare

nigelF

Hi folks and fellow chickens of the spring variety...I've had a read of the SIPP websites - I'm a bit worried about having to purchase various funds and investment options to keep my pension on track - wouldn't know where to start... Also, apart from choosing your own investment options, I can't see much difference between staying with the Pru or transferring to a SIPP? Surely the fund is still invested while taking an income - albeit not flexible?

dunstonh

Perhaps you should be seeking independent advice.

DIY is for when you know what you are doing. At this stage, you could do more damage than good if you get it wrong.

margaretclare

nigelF wrote:

Also, apart from choosing your own investment options, I can't see much difference between staying with the Pru or transferring to a SIPP? Surely the fund is still invested while taking an income - albeit not flexible?

No, it isn't still invested. All the Pru, FP and others can do is point you towards an annuity. Once you've got this, OK you can get your 25% tax-free lump sum, but the rest of the fund goes to providing you with an income, and once you've got this, there's no going back, you can't tinker with it, the income is paid to you according to the rates in force at the time, subject to things like indexation and spouse's pension.

HTH

Margaret Clare

EdInvestor

nigelF wrote:

Hi folks and fellow chickens of the spring variety...I've had a read of the SIPP websites - I'm a bit worried about having to purchase various funds and investment options to keep my pension on track - wouldn't know where to start...

It's not rocket science, but does require some effort.Don't you think it's worth it, to make sure you have adequate money for the next 40 years? In order to get the tax free cash out and keep the rest invested to grow, you need to go the SIPP route.You can have an advisor to help if you want (but you have to pay him).

Perhaps it would be better if you defer any decisions on this until you have moved and settled and have some spare time to devote to your investments.

BTW re NI conts, it's voluntary class 11 you need to look at, class 111 are the more expensive ones.



Also, apart from choosing your own investment options, I can't see much difference between staying with the Pru or transferring to a SIPP? Surely the fund is still invested while taking an income - albeit not flexible?[/QUOTE]