Correct advice from an IFA?

CivicMan

I hope this not yet another re-post!

I have a private pension with Scottish Widows to the value of £41,000. I am 58 years old and want to take 25% as a cash sum. I have frozen the pension and do not pay into it anymore.

I am quite happy to leave the balance with Scottish Widows, but my IFA wants me to move to another pension provider and purchase an annuity now with the balance, and not when I retire.

Is this the rule, because I'm taking 25%? Does the rule change if I take say 20%?

Or does he want me to move in order to gain some commission from a new provider? Sorry to be suspicious but one never knows who to trust these days!

Thanks for any advice!

dunstonh

Is this the rule, because I'm taking 25%? Does the rule change if I take say 20%?

Why do you want to leave the 75% with Scottish Widows? If you want to do unsecured income then chances are that the product you have cannot do it (only the SW Retirement Account can do it. All their stakeholders and personal pensions cannot). So, that would explain the product change.

If you are not want to do secured income then using the open market option rather than SW makes sense as SW annuity rates are poor unless you have an old pre 95 contract with guaranteed annuity rates.

Whether you take 20% or 25% doesnt matter.

Or does he want me to move in order to gain some commission from a new provider?

He gets paid if you use SW or move it elsewhere. He wants you to get a greater income and/or use the right contract for you.

Thanks for any advice!

Ask the IFA these questions. Its clear you don't understand the reasons why. That is what the IFA is for.

CivicMan

Thanks for that Dunstonh - I just try and communicate in simple terms but my IFA will insist on using a lot of financial gabble.
Bottom line of my question was, if I take the cash sum, does the balance immediately have to buy an annuity or can it wait until I retire bearing in mind annuity rates are pretty poor at the moment?

dunstonh

I just try and communicate in simple terms but my IFA will insist on using a lot of financial gabble.

Use an IFA that speaks English then.

Bottom line of my question was, if I take the cash sum, does the balance immediately have to buy an annuity or can it wait until I retire bearing in mind annuity rates are pretty poor at the moment?

If you choose the secured pension income option then you have to buy the annuity now if you want the 25% cash. SW are unlikely to be the best option for that so you would expect a transfer to be made to another provider.
If you choose the unsecured pension income then you can defer the income but take the 25% cash. The contract you have now almost certainly will not offer the unsecured pension income option. Hence why you would expect it to be transferred to one that is.

jamesd

Why does your IFA think that it is right to buy an annuity now? It's almost certain to be the wrong decision when you aren't retiring for many years.

If you want the lump sum your best option is probably going to be:

1. Use income drawdown from a range of investments instead of buying an annuity.
2. Take the maximum income allowed by the GAD rules, getting the GAD calculation done this year before the limit changes from 120% to 100% of the GAD limits and before new lower GAD limits come into effect.
3. If you don't need the extra income, contribute it to an new personal pension if you want more tax relief at the cost of locking up the capital, perhaps because you'll be in a lower tax bracket when you retire. Or put it in the same investments in a stocks and shares ISA if you want to keep the capital available within a tax wrapper.

Taking the income now either lets you circumvent the new lower income limits by saving the annual limit amounts until you need the income or lets you get a double chunk of tax relief, whichever you prefer.

There's no minimum pension pot value below which income drawdown is unsafe or inadvisable, except when the pot is so small that the costs are prohibitive, which doesn't apply to yours.

The coming changes in annuity rates due to the recent European Court decision are likely to make income drawdown far more popular with men than even now. Investments don't discriminate on gender while annuity providers will be forced to so and use men's lump sums to subsidise female annuitants. That will reduce annuity payouts for men and make income drawdown more attractive for them. You should expect to find that income drawdown will be your best option when you retire as well.

dunstonh

Why does your IFA think that it is right to buy an annuity now? It's almost certain to be the wrong decision when you aren't retiring for many years.

Its probably as the pension fund is very small. The FSA still view drawdown as a higher risk transaction and suitable for larger pots. They really havent caught up with modern contracts and options. Also, IFAs have a greater responsibility for people in drawdown. Its not a "transactional" advice thing. So, by the time you factor in the reviews, then a £30000 residual pot isnt enough to cover costs.

jamesd

Well, I can see how it might be right for the IFA and business risk reduction. If the IFA is unwilling or if it's uneconomic due to a regulatory requirement for reviews with their associated costs, then a do it yourself transfer to say Hargreaves Lansdown and going into drawdown with them seems like one approach to take that's better than taking the large loss from buying an annuity at this point.

Not even a need to get fancy, can take the 25% and stay invested in exactly the same funds and take no income at all if that's wanted. Possibly buying life assurance if the changed death benefits aren't sufficient for some reason.