Final Salary or transfer

Hannath

I am a 53yr divorced male with x2 non-dependent sons, looking to retire in 18 months time. I have a final salary scheme that wil pay me £31k pa along with £200k+ lump sum in 2013 (transfer value £850k). My dilema is whether to except this or transfer into a personal scheme take the lump sum and take advantage of the new flexible drawdown facility (after securing at least £20k pa) ... the final salary would index link my pension, but the widows and kids benefit is no use to me unless I re-marry. The later would at least leave money invested that my sons could benefit from ???

jamesd

With £650k available to purchase an annuity after matching the £200k lump sum you'd be looking at needing a 4.77% annuity rate. The best I see at the Money Advice Service for a non-smoker in my area pays just 3.03% with RPI escalation, 3.68% with 3% escalation or 5.46 level, no escalation. That could change greatly if you are ill or have something that affects your life expectancy negatively.

If a non-smoker were to start out with £650k and buy a £20k level annuity that would cost them £366k leaving a £284k top up to the original £200k lump sum, £484k total. That's £11k a year lower income so you'd be poorer after 20-25 years compared to saving the extra income. With a life expectancy that's likely to extend to the high 80s or so a male in normal health at 55 can hope for 35 more years, so that doesn't look like a good trade off.

If you were instead to use income drawdown you might be able to benefit. In particular, the capital pot would be inheritable if you didn't buy an annuity with it. No tax charge if paid into a pension pot, else a significant tax charge that's still better than losing it all. But this assumes some investment returns and is a bigger benefit if you die early rather than late.

You do have an alternative if inheritance is your objective, though. You could buy life assurance policies for each son that pay out in the case of your death and fund those out of the ongoing income.

What are your objectives? Just inheritance? If just that, I doubt it's in your best interests or those of your sons to do this. If you have good reason to believe that you are likely to die substantially younger than normal that could hugely change the picture.

You should consider professional advice from an IFA, though.

Hannath

Thanks for reply ... not too worried about IHT ... more about getting value for money from my pension input over the years ... crude I know, but £200k lump sum plus x20 years at £31k I will have recovered the current transfer value (ignoring escalation) .... but if I die early it dies with me which is why the new Flexible drawdown sounded interesting ... take £20k per annum (as per rules) ..max lump sum ... and have the rest available to draw down on /or pass on to kids if I die as you say ... if only I had a crystal ball ??

jamesd

Life assurance is the best buy if you are worried about risk for a decade or two.