Fixed Term Annuity implications?

savewhereican

I will be 65 later this year and intend to draw my state pension. My wife currently draws her state pension and our joint income would be low enough to receive pension credit as a top up.

I have a small private pension that I am thinking of buying a 3 year fixed term annuity with but I am unclear on the following:
Can the DWP insist I buy a standard annuity that gives me an income when i`m 65 which may reduce the cost to the state of paying me pension credit and any associated benefits?

I need the pp tax free lump sum now and I am thinking of a fixed term because the income from a standard annuity taken now would leave us only slightly better off compared to the state, if at all.

I was in work for 45 years until losing my job (without any recompense) 5 years ago and since then have been on guaranteed pension credit. I do not have any savings.

Grateful for any replies.

dunstonh

Can the DWP insist I buy a standard annuity that gives me an income when i`m 65 which may reduce the cost to the state of paying me pension credit and any associated benefits?

No they cant. However, if you deliberately take less income than that available through a lifetime annuity then they can use the higher income of a hypothetical annuity in any means test.

I need the pp tax free lump sum now and I am thinking of a fixed term because the income from a standard annuity taken now would leave us only slightly better off compared to the state, if at all.

This is where the benefit system is so wrong. You are better off with your own provision but you wont take it as you will lose benefits.

savewhereican

I agree that the state benefit system is wrong. However, having paid 45 years of NI contributions and finding myself redundant 5 years ago through "financial maladministration" resulting in the company closing without any funds left, I feel that the state owes me more those that seemingly abuse and take advantage of the benefits system.
Further, I am niggled that whatever the government say (and do far less) ageism does exist and is practised in the real working world. I am testimony to that.

savewhereican

Thanks dunstonh for your reply.

I`m hoping you or someone in the know can assist me with this one.

Today I asked the DWP helpline as to how this works.

They tell me that when I draw my state pension in August this year at age 65, as I would have a pp fund but choose not to take an income from it, any pension credit will be withheld/reduced by the amount of pp income I could be taking.

The DWP seem oblivious to the workings of a fixed term annuity.

What to do for the best now seems very confusing, for if I buy a fixed term annuity now (as I need the tax free lump sum), how would the DWP/anyone be able to set a level of "invisible" non-existent income on this come August when I`m 65?

As I understand, I could have bought a fixed term annuity previously at anytime from age 55 which had not yet paid an income. What would the situation have been then?

Again without labouring my niggle point, as said, I`ve paid 45 uninterrupted years of full NI conts and if I bought a standard annuity now in order to get my cash, (which seemingly would fall in line with the DWP?) when I draw my state pension my wife and I collectively will be approx. £12 pw better off after tax etc than we are now. This is from a pp income of £65 pw (14 years ago estimated to be £290!).

£65 pw from my fund to net £12 pw!

My redundancy and the poor performance of my pension fund/annuity rates seem to me, both due to financial mismanagement and I have to pay the price.
I was close to being one of the many victims of pension mis-selling and advice in the eighties.

When reaching official retiring age it seems that one has to have either nothing at all or a pension fund so large the weekly detail is insignificant.

Sorry for using this forum as a wailing wall but I am seriously looking for help and guidance if possible please.

(Sorry for the large text size, I had to cut & paste from a word doc and I cant edit it down now its posted).

dunstonh

The DWP seem oblivious to the workings of a fixed term annuity.

Probably yes. However, they are more interested in the amounts possible. Not the best death benefits or attempts to time markets.

What to do for the best now seems very confusing, for if I buy a fixed term annuity now (as I need the tax free lump sum), how would the DWP/anyone be able to set a level of "invisible" non-existent income on this come August when I`m 65?

You declare the fixed term annuity income. Then get an annuity illustration on 100% joint life basis with RPI indexation and 10 years guarantee. If that produces a higher income then they will use that in the means test. If it products a lower income then you dont have to worry about it as you are declaring the higher income.

My redundancy and the poor performance of my pension fund/annuity rates seem to me, both due to financial mismanagement and I have to pay the price.

Long term returns havent been poor. Over most periods they have still beaten alternatives. Annuity rates are based on current market issues.

This is from a pp income of £65 pw (14 years ago estimated to be £290!).

Example illustrations are never estimates. They are example illustrations using assumptions that may or may not be correct. 14 years ago, gross investment returns were higher. Net [of inflation] returns are not much different. So, in real terms you probably have got something similar to £290 had those previous assumptions come true. Problem would be that if those assumptions had been right, the £290 would probably have lower spending power than £65 today.

I was close to being one of the many victims of pension mis-selling and advice in the eighties.

The person that set up the pension review of 1988-1993 has since said that with hindsight, the pension mis-selling issue was not as great as suspected at the time and too many people were paid redress when they shouldnt have been. In the 50 years that pensions have been available, a window of 5 years affecting a minority of people is not as big as you realise. Also, you said close to being one of the victims. That means you were not. So, its not really an excuse.

Things were not ideal in the past at times and there have been issues but you cannot really blame things that do not apply to you.

The bottom line with pensions or any other saving/investment is that what you get back is only as good as what you pay into it. Your income suggests a pension pot of just £40k to £50k. That is your main problem. You had 45 uninterrupted years of employment but only managed to put aside that amount.

xylophone

http://www.olderpeopleleeds.info/clients/infostore/files/FS53Capital_income_and_means_tested_benefits_fcs.pdf
"In certain circumstances you may be regarded as having income that you
may not possess – if, for example, you fail to apply for income or have it paid
to someone else on your behalf. This 'notional income' can be taken into
account and reduce the amount of benefit you receive. You should seek
advice if this is applied to you."

As I understand it the FTA would allow you to draw the TFLS but no income if you so chose. But see above?

savewhereican

dunstonh, many thanks for your replying so late at night.

Understand where you are coming from but could you kindly clarify on your comment re:
"declare the fixed term annuity income"? Then get an illustration?
I don`t fully understand the workings of a fixed term annuity but I wouldnt effectively have an income from this for three years or whatever term I buy one for, and my understanding is that it is generally best to opt for no income when buying the plan as the fund maturity value will, most likely buy a better income at maturity?

If I buy (as I think i`m going to) a fixed term plan now should I declare it to the dwp now or when? Indeed, do I need to declare it at all in the short term?

My fund is worth £82500.
When I changed jobs in 1992 to a company that did not have a pension scheme I was "advised" by my banks pension advisor to freeze the fund which I agreed to but along the way I incurred hefty charges that reduced the value.

dunstonh

Understand where you are coming from but could you kindly clarify on your comment re:
"declare the fixed term annuity income"? Then get an illustration?
I don`t fully understand the workings of a fixed term annuity but I wouldnt effectively have an income from this for three years or whatever term I buy one for, and my understanding is that it is generally best to opt for no income when buying the plan as the fund maturity value will, most likely buy a better income at maturity?

You dont buy a short term annuity if you dont want an income. You just put the pension into unsecured income option and select zero income. No annuity of any type is involved. Are you perhaps looking at "third way" style products which allow you to defer the income until later allowing a higher amount when they do start?

If you are using taking zero income then the principle still applies. Get an illustration of pension annuity using the terms mentioned. This gives the lowest annuity rate and it will be that figure that they assume on the means test.

My fund is worth £82500.
When I changed jobs in 1992 to a company that did not have a pension scheme I was "advised" by my banks pension advisor to freeze the fund which I agreed to but along the way I incurred hefty charges that reduced the value.

Cant change it for you but it may help others to say the following... NEVER get advice from a bank sales rep. They do not have the scope of authorisations to discuss or advice on options that they are not able to offer themselves. Back in 92, rules were different to today but the only thing that would have stopped you paying into that pension in 92 would be if the scheme was linked to another employer or the new employer offered their own scheme. Had it not been a bank and the scheme did have some strange charges being levied if paid up, then an IFA could have moved it to one that didnt have that. A bank tied agent cannot.