Section 226 Retirement Annuity Contract

leonotis

I will be 60 this month and am really struggling with Aviva to sort out my Section 226 retirement annuity contract which I took out 1985.

I was told in the beginning, that I would be entitled to a tax free lump sum of up to 30% when I took the pension.

I am now aware that some rules changed in 2006 making 25% lump sum the norm, and after a very difficult time trying to speak to anyone but call centre staff I am told this is also the case with this historic 226.

On some web sites I have looked at they say this is not always the case on these old 226s.

Can anyone out there please clarify, am I entitled to up to 30% lump sum on this 226 taken out in 1985? This was a pre - 1988 contract, which seems to be another significant date re pensions.

HELP!!!!

dunstonh

was told in the beginning, that I would be entitled to a tax free lump sum of up to 30% when I took the pension.

S226 tax free cash was 3 times the annual annuity payable. So, for some people that could equate to 15% whilst others could get over 30%. It was never percentage based.

Can anyone out there please clarify, am I entitled to up to 30% lump sum on this 226 taken out in 1985? This was a pre - 1988 contract, which seems to be another significant date re pensions.

No you are not unless you happened to apply for transitional relief before 2006. Also, for you to get a figure to equate to 30%, even before 2006, would indicate you have guaranteed annuity rates. So, you may well be in a position that taking a lump sum would be a very poor option.

leonotis

dunstonh, thanks for the reply. Regarding the 30% lump sum, I can recall the person who sold me the pension mentioning that I could get that as a lump sum. However, after some research today, it seems that what you are saying about 3 times the annual annuity is correct.

Not sure what transitional relief is - could you explain this for me?

And yes, I do have a guaranteed annuity rate. According to Aviva, it's 9.503% if I take my pension annually in arrears, or 9.02% if I take it monthly. Can you explain why taking a lump sum would be a very poor option?

kidmugsy

"Can you explain why taking a lump sum would be a very poor option?" Because it would mean giving up that excellent annuity rate. You'll not get a return like it anywhere else.

dunstonh

kidmugsy wrote: »

"Can you explain why taking a lump sum would be a very poor option?" Because it would mean giving up that excellent annuity rate. You'll not get a return like it anywhere else.

yes basically. If its an annuity rate of say 10% then a guaranteed income of 10% for life is way above what you can achieve elsewhere.

Most 226 pots are quite small and only make up a small part of the overall retirement provision. So, it can make sense to not take the 25% on them but take it where GARs do not exist.

atush

you ar gkiving up 3-3.5% of your lump sum annually if you did this. I would not personally consider taking a lump sum if I could get 9.5%.

Do you have other pensions that you could take a lump sum from?

leonotis

atush, yes I do have a couple of others. But I thought it was best to take as much as possible as a lump sum seeing as it is free of all taxes, whereas if I do it the other way, I will lose 20% of it to the taxman. That is one fifth lost to the treasury, plus a loss of 3.7% interest the lump sum would give me via an ISA that I've seen.

FARJARDO

Is the GAR. only to be paid yearly in arrears? if so and the worst happens and it is on a single life you lose all? Is your health good? I,am in the same position ,GARS. WORTH 200,000,do I take the 25% or hope I live 12 more years then I,am on a winner.....?

dunstonh

But I thought it was best to take as much as possible as a lump sum seeing as it is free of all taxes

Not if you put it into something that pays less after taxes.

whereas if I do it the other way, I will lose 20% of it to the taxman. That is one fifth lost to the treasury, plus a loss of 3.7% interest the lump sum would give me via an ISA that I've seen.

The lump sum would give you 3.7% on the ISA but the pension could be giving you 10% before tax and 8% net of tax. Do you want 3.7% or 8%?

Of course we dont know the annuity rates and are just guessing. Without knowing the annuity rate we can only guess.

atush

And it also begs the question as to how much other income you will be getting? That would tell us what your tax tate would be.


Lump sums are great. Except- If you have a FS pension and taking one would reduce these best of all pensions index linked payments. Or, GARs where you will do much better than the current market rate for annuities.

Loughton_Monkey

Not only would I strongly urge taking 100% annuity, I would consider the annual rather than monthly option too. It seems to boil down to about just short of 6% equivalent interest. Not bad. And after the first 12 months there is no further 'hurt'.

I think you will find call centre staff have been trained - for GAR policies - to be polite but not particularly 'forthcoming' on all your options.

I have very recent experience of such a company who issued retirement 'quotations' with [to be fair] a separate sheet setting out the GAR [13.87% in this particular case at age 70], but nevertheless the sheet giving the formal illustration is based upon their 'current' rate of 6.5%. To my mind, this is "iffy". I think it would pass a compliance test, since their 'pack' does include the truth. But any less sophisticated person who either (a) doesn't read the single sheet carefully, or (b) reads it, but 'assumes' that the illustration has used the guaranteed figures without getting out the calculator to check, is likely to shop around and easily find a 7.8% market rate. Then they would transfer without delay!

This is exactly what they want!