Pension - keeping options open?

middlepuss

OP - I agree with dunstonh and atush.

A level annuity at your tender age sounds like madness as it would sentence you to a life of declining real income. If you can only afford a level annuity then, as atush says, can you afford to retire?

What is the cash size of your 4 pots added together? I'm wondering what sort of income you'd get if you lumped all 4 pots into a SIPP and went into drawdown, where the income you take equates roughly to the yield of the underlying investments (4%???). This should give you a pension income that at least keeps up with inflation.

okydoky

Thanks for this - the combined value of my 3 pensions is about £140K. The value of the one I was thinking about maintaining is about £70K - idea was to continue this one for another 5 years or so and then maybe take drawdown or an annuity with index linking.
I do have other savings of about £170K and intention was to "drawdown" from this at about £8K pa to supplement my pension income although I accept there is no inflation proofing here either. I will have a decent state pension in ten years which is currently projected at about £8k pa and wife will have state pension as well as small work pension. Also wife will be working p/time until retirement with income of about £10K after tax so notwithstanding inflation risk, it still looks do-able to me.
Any other observations appreciated.

Linton

okydoky wrote: »

Thanks for this - the combined value of my 3 pensions is about £140K. The value of the one I was thinking about maintaining is about £70K - idea was to continue this one for another 5 years or so and then maybe take drawdown or an annuity with index linking.
I do have other savings of about £170K and intention was to "drawdown" from this at about £8K pa to supplement my pension income although I accept there is no inflation proofing here either. I will have a decent state pension in ten years which is currently projected at about £8k pa and wife will have state pension as well as small work pension. Also wife will be working p/time until retirement with income of about £10K after tax so notwithstanding inflation risk, it still looks do-able to me.
Any other observations appreciated.

Suggest that you put together a year by year plan on a spreadsheet and see how it pans out with a range of investment returns and inflation rates.

atush

I personally would be unwilling to take an annuity at this point in time as with QE and rates so low on gilt yields I would be waiting until yields and annuities rose.

middlepuss

okydoky wrote: »

Thanks for this - the combined value of my 3 pensions is about £140K. The value of the one I was thinking about maintaining is about £70K - idea was to continue this one for another 5 years or so and then maybe take drawdown or an annuity with index linking.
I do have other savings of about £170K and intention was to "drawdown" from this at about £8K pa to supplement my pension income although I accept there is no inflation proofing here either. I will have a decent state pension in ten years which is currently projected at about £8k pa and wife will have state pension as well as small work pension. Also wife will be working p/time until retirement with income of about £10K after tax so notwithstanding inflation risk, it still looks do-able to me.
Any other observations appreciated.

So that's £210K in the pension pots plus £170K in savings which is £380K in total. What income do you need from this £380K?

Do you put money into ISAs each year?

One option to consider could be to withdraw 25% from the 3 £140K pension pots and put that £35K into an ISA over 3 years - the advantage being that income from the ISA would not be taxed. Then take a drawdown income from the remainder of the 3 pots. And take the 4th pension in a few years as you say.

okydoky

middlepuss wrote: »

So that's £210K in the pension pots plus £170K in savings which is £380K in total. What income do you need from this £380K?

Do you put money into ISAs each year?

One option to consider could be to withdraw 25% from the 3 £140K pension pots and put that £35K into an ISA over 3 years - the advantage being that income from the ISA would not be taxed. Then take a drawdown income from the remainder of the 3 pots. And take the 4th pension in a few years as you say.

Have not really considered it that way but yes £380K in total. I need about £15K pa now but probably need this to increase by 4/5% pa to keep up with inflation.

I been stocking up on ISA for last few years so most of my non-pension savings are in ISA's, mainly S & S, with balance in cash accounts earning only around 3%.

If I take the 25% as you suggest and "ISA" it, do you think this would outperform the pension performance/annuity option? I appreciate the tax advantages.

I am nervous around the inflation risk more than anything else but guess the £15K out of combined pot of £370K is only 4% so the buying power of the total will fall but only fairly slowly.

Anything else I'm missing??

jamesd

Better to take drawdown on all of the pensions than drain the non-pension money. You can take the income and invest the part you don't need outside a pension, say in a S&S ISA. The ISA money then provides tax free income so you end up gradually moving to a better tax situation.

You also get that 3600 a year into another pension option (or more if working) and more tax relief on that with another tax free lump sum whenever you want to take it.

middlepuss

okydoky wrote: »

Have not really considered it that way but yes £380K in total. I need about £15K pa now but probably need this to increase by 4/5% pa to keep up with inflation.

I been stocking up on ISA for last few years so most of my non-pension savings are in ISA's, mainly S & S, with balance in cash accounts earning only around 3%.

If I take the 25% as you suggest and "ISA" it, do you think this would outperform the pension performance/annuity option? I appreciate the tax advantages.

I am nervous around the inflation risk more than anything else but guess the £15K out of combined pot of £370K is only 4% so the buying power of the total will fall but only fairly slowly.

Anything else I'm missing??

£380K @ 4% gives you around £15K before income tax. The experts will comment, but I'd have though you'd get 4% from a high income unit trust or investment trust and you'd expect that income to rise year on year. But no guarantee of that. So going this way, rather than the level annuity route, should mean you don't have to worry so much about falling buying power. And when you get older you can always take a higher income which effectively eats into the capital. No point kicking the bucket at 100 and your pension pot investments are now worth £1,000,000.

You ask if the ISA option would outperform the pension option. Bear in mind if your pension pot is moved into a SIPP you can invest it in what you like. So you can eg hold the same unit trust in your SIPP as in your S&S ISA. (Though in practice you'd probably want to spread across a few unit trusts or whatever). Income taken out of your SIPP is subject to income tax, income taken out of your ISA isn't, so taxwise you'd want to move as much of your money into ISAs as you can.

However, having all your savings in stock market investments implies risk: what if stock markets go belly up? There again, if something cataclysmic happens to the worldwide financial system how safe would an annuity paid by an insurance company be...? You pays your money and you takes your choice.

jamesd

For something like Invsco Perpetual Monthly Income Plus you'd be getting 7%. But you wouldn't want to use only that because its main focus is on high income. It's just a nice one to be aware of for the income generating part so you can invest for capital growth to keep up with or ahead of inflation with the rest.