0ne joint life annuity versus two single life

ianrberts

Hello everyone,

I was looking into the topic of annuities to gauge how much pension my wife and I were likely to get when we retired at 66 when I spotted something that I didn't understand and wondered whether any one here would be able to make sense of it.

I was looking on the moneymadeclear website http://www.moneymadeclear.org.uk/tables/bespoke/Annuities and for the fun of it checked the amount that would be received for a joint life annuity at 66. Note my wife is the same age as myself and this was for a £100000 fund with no guaranteed term but with a 50% spouses income on my death. This came to £309 a month for a RPI linked annuity.

I then checked to see how much two single life annuities each for a £50000 sum with no guaranteed term would generate. For this it showed that per month I would receive £173 and my wife £162 again with RPI linking.

So two single annuities would generate £335 i.e. nearly 10% more than a joint life, and on my death my wife would still receive more than the 50% of a joint life annuity.

The only way I can see that we would lose on two single life annuities would be if my wife died first, but statistically that is unlikely and if she can live on 50% of a spouses pension then I'm sure that I can too .

Is there any other reason that people can see why two single life annuities provide more money?

Thanks for any help.

Cautious_Investor_3

ianrberts wrote: »

Hello everyone,

Is there any other reason that people can see why two single life annuities provide more money?

Thanks for any help.

Single life annuities will always produce more income that joint life annuities as they statistically will not pay out for as long.

However there is one possibly fatal flaw with your arguement. I assume the money that is being used to buy the annuity is held in a pension? If this is so, and let's say for the sake or arguement that the pension is in your name, you cannot use it to purchase an annuity in your wife's name. It has to be an annuity in your name and she is the 2nd life on it.

You can get round this to a degree by using the tax free lump sum to buy a Purchased Life Annuity (PLA) in your wife's name. A PLA has some tax advantages over a normal lifetime annuity, I can go into more detail on this point if you wish me to.

The Cautious Investor

dunstonh

Two single life annuities are likely to be more tax efficient as well as you get to use both personal allowances and less likely to be hit by the age allowance reduction level.

To do that though you would need two individual pensions. However, that is not often a problem for most people and its what they should be doing anyway.

ianrberts

Thanks to both of you for your replies.

Currently all of our new contributions are being paid into my pension as I'm a higher rate tax payer and my wife is currently at home looking after the children and so does not pay any tax.

However it did make me wonder about the future and what to do under various scenarios e.g. restriction of higher rate contributions or myself working part-time and hence not being a higher rate tax payer. Then instead of continuing to pay solely into my pension pot I wondered whether it would make sense to increase my wife's pension.

Assuming that we could get enough money into my wife's pension then as far as I can see, the only downside to two single life annuities is if my wife died first then the amount of money coming into the household would go to approximately 50% of what a joint-life annuity would give, but that is what would happen anyway if we took out a joint-life annuity and I died first.

jamesd

You might also consider income drawdown for some of the money. 100% of that pot can be transferred to the pension pot of a spouse without tax charge, so it'll also pay out 100% of the original income if they keep the same investments. No reduction at all.

One way to exploit your higher rate tax situation is to take the 25% lump sum from some of the pension at 55 and recycle that into pension contributions for your wife or yourself. You'd need to check the recycling rules at the time you do this, since there are limits on how much you can do at once into a pension in your own name. For your wife the current contribution rules just limit tax relief to 100% of her taxable income or £3600 after tax relief, whichever is highest. It'll get a second chunk of tax relief on the new contributions. The cost is worse death benefits if the remaining 75% doesn't get paid into a pension pot of a survivor of your death.

Cautious_Investor_3

jamesd wrote: »

You might also consider income drawdown for some of the money. 100% of that pot can be transferred to the pension pot of a spouse without tax charge, so it'll also pay out 100% of the original income if they keep the same investments. No reduction at all.

Hi

I might be misunderstanding you here but I don't believe there are any circumstances when 100% of an Income Drawdown fund can be transferred to a spouse.

Could you kindly expand on your comments?

The Cautious Investor

jamesd

jamesd wrote: »

You might also consider income drawdown for some of the money. 100% of that pot can be transferred to the pension pot of a spouse without tax charge

Cautious_Investor wrote: »

I might be misunderstanding you here but I don't believe there are any circumstances when 100% of an Income Drawdown fund can be transferred to a spouse. Could you kindly expand on your comments?

You may have missed the very significant words that I've placed in bold here "to the pension pot of a spouse".

As you know, prior to taking benefits, 100% can be paid to beneficiaries even outside their pension. After benefits are taken, it's 100% into another unsecured pension, or something else like payment into the estate outside a pension with a 35% tax charge first. I'm also assuming that the pots involved remain below the lifetime allowance, which seems to be very comfortably the case at hand.

I like the death benefits summary from MWPensions, which does a fairly good job of covering the cases.

Please do let me know if you're aware of some factor that you think I've missed. Corrections are very much appreciated.