Stick with SIPP or look at Temporary Annuity

SeniorSam

Lots of great advice on this site, but have not spotted comments on Short term annuities.


This is something I have been looking into myself recently. I do not know enough about pensions, particularly the way to consider commuting a 'Pot', whatever sort it may be and I have been looking at this recently, as it may be a 'stop gap' to consider for me and others?

As I understand it, after taking your tax free cash from a pension fund, the balance can be used to buy a short term annuity for 5 years, with a guaranteed sum at the end of that period to but a lifetime annuity or possibly another short term one.

During the period, if you die, a guaranteed sum is paid, so the initial purchase price is not lost forever, as in a lifetime annuity.

What has made me curious is that last April, at age 70, I obtained an illustration for an after TFC sum of £198,00 which would produce a short term annuity with 5 year guarantee and a 50% spouse pension, escalating by 3% pa. That figure was £9,732.12. A few days ago, I looked at the pot, which has increased by £20k since then, and would now give a sum of £204,640 to buy the short term annuity , but the annuity figure has dropped to £9,484.24 p.a.
Obviously going down as I am getting older - no joke! I am now 71 years of age and although my SIPP fund is growing well (only one of the 4 funds dropped by £430), do I hang on and hope for continued growth, or will it simply balance out in another 4 years time when I'm 75.

Drawdown was the right way to go ONCE, but will it still work well? Any crystal balls out there.

Sam

Loughton_Monkey

Annuity rates have been plummeting as we all live longer. In addition, fixed interest yields have reduced as well. So there is no surprise to anyone in those sorts of figures.

I asked my crystal ball if annuity rates are set to zoom up again, and it very loudly shouted "No".

Then I asked about projected fund performance for 10,000 funds over the next 4 years, and strangely enough, it remained totally silent on the matter.

SeniorSam

Thanks for that brief glance into your crystal ball.

If I stick with the SIPP an d drawdown, the GAD rates could fall and the overall value is uncertain even though it has done well this last year. I believe that they are something like 2.5% now, but I was told that they would not drop below 2%, but not sure that is true or not?.

If I move to the short term annuity for 5 years using the £204,604, I can get £10,248 escalating by 3% pa with a guaranteed maturity value of £165,069 to buy another annuity when I am 76. AS an alternative, a level short term annuity of £12,375 with guarantee maturity of £156,851, which may be better to allow for more holidays whilst we can enjoy them.

I believe in either case, were I to die, the lump sum would pass to my wife, so there is a safety factor there, plus the fct that the ongoing costs of drawdown are far higher than costs of the short term annuity.

Difficult to decide what's best to do, but I have had only one quote from Metlife, so may look at what others have to offer and see what's what.

Thanks again

Sam

jamesd

Not quite right re drawdown income. The floor that has been put in place is on the gilt yield that is used to work out the GAD limit. If the gilt yield falls below 2% a yield of 2% will be used. Currently the one being used is 2.5%. Here's a table that shows how GAD limits change with age and gilt yield.

For a 70 year old man the current GAD limit is £66 per £1,000 in the pot, so 6.6%. If the gilt yield was to drop to 2%, that would reduce to 6.2%. By the time of your next GAD limit calculation, assuming it's three years away, your increased age would increase the income limit more than a reduction in gilt yield to 2% could reduce it.

That short term 3% annuity pays out at 5%. Both will have some inflation protection, just in different ways. Both of the annuities seem likely to make you poorer because of the reduced value at the end of the period. It looks quite likely that you can have no or minimal value reduction using drawdown.

You're still some way away from being old enough for annuities to pay out more than drawdown and even once you eventually reach that point the spousal or inheritance benefits might be sufficient reason to continue drawdown.

You are reaching the point at which you won't be able to generate enough investment income to cover the money the limit lets you take out. That means that long term you can take income levels that reduce the capital if you want to.

I'm not sure why you'd think that the ongoing costs of drawdown are far higher than an annuity. They should be a pretty small percentage of a pot the size of yours. Maybe you're in an expensive drawdown scheme? What charges are you paying?

SeniorSam

Thanks James,

I understand that until I decide to actually crystallise, I am only paying the fund charges of between 0.75 and 1.5%. When I eventually crystallise, then an initial charges and ongoing charges that Hargreaves Lansdown operate on their scheme, of around £3000 deducted from the pension fund and ongoing fund management fees. The short term annuity is just the one off initial commission £4,o92 from a 2% commission enhancement.

As mentioned, I am a little lost on pension matters, but in looking at other assets today, such as ISA's and Bonds, plus Premium Bond maximums, I may now consider drawing from the large pot of ISA's as required and leave the pension fund to grow for a few more years.

Thanks for your input and that of Loughton Monkey

Sam

jamesd

£3,000 from HL? Sure you didn't add an extra 0 in there? Their main charges are:

Starting capped income drawdown: no charge
Each GAD calculation: £75+VAT (once every three years until age 75, then once a year)
Regular income payments: no charge
Ad hoc payments: £25 + VAT
Alter payment amount or frequency: £10 + VAT

So it should come in at less than £100 + VAT in fees to get started in drawdown with HL.

So I'm really puzzled at how you can get to a £3,000 cost. Maybe that includes all of the fund management fees as well? At 204,000 invested and 1.5% that would cost around £3,000. Of that you could save perhaps £1,000 by not using Hargreaves Lansdown.

I think it's better to take pension income than non-pension income. The non-pension capital is more flexible so you increase your flexibility by taking money out of the pension instead of other things.

SeniorSam

Thanks James, I used that £3000 figure from the information given by the adviser who e-mailed me, but it seems he may have been wrong on costings.

If we draw from our ISA's, there is no tax to consider and I can leave my pension pot to grow, rather than disturbing it and getting into a taxed pension income situation. In 4-5 years from now, when I have passed the 75 age, hopefully the annuity rates will be better and as long as I can maintain the pension value in a spread of low risk funds, I still have plenty of flexibility with the ISA's, Bonds and Premium Bonds if necessary. Bit surprised you feel the other way. However, decision now made and I've put the pension on hold.

Thanks again for your input

Sam

dunstonh

If you are using HL for advice then you will get advice charges. Dont mix up the DIY platform with what they do on their advice service.

SeniorSam

I don't use HL for advice. I select my own life funds for investment following my own research, which has proved sound.

Still prefer tax free income rather than taxed.

Sam

gfplux

Are you saying that HL charge 1.5% of fund value in drawdown. So a fund of £250000 they will charge £3750 per annum just to hold the fund!!!!! With no advise.
Wow.

jamesd

That seems to have been the price for IFA advice on investments, not just holding them. Holding them is a bit less expensive, about 0.% taken out of 1.5% that a fund might charge. Though it can be a lot less if you use some of the trackers and have a sufficiently large pot to justify the platform fee. HL isn't the place to go for cheap holding with pension pots of this sort of size.