Advice needed please on when to take annuity

Froglet

Hubby lost his job in January so we started to make enquiries about taking annuity 4 years early(he is 61).Then discovered that whilst on job seekers you lose it if over a certain sum(which it would be though not vastly so).So we decide to wait for at least the 6 months.

However thankfully today he has just been offered another full time job.We spoke to an IFA last month before we knew about these rules,and he advised that it would be quite sensible to take the pension early ,rather than wait till 65 as not likely to increase massively in 3 years.

This would make sense if hubby not working again.But now he is,he would pay tax on it .The IFA however said there would be ways round that so we would not lose out and the pension could be redirected so as not to pay tax.That i do not understand at all.He is a new IFA to us so we are cautious,not paying him yet he is just making initial enquiries.

Thoughts please on both issues.

Thank you.

BLB53

Personally, I would be very wary about the advice you are being given by the IFA. I suspect many of the less scrupulous advisers will be trying to secure commission before the new rules on RDR kick in next year. (or am I being too cynical?)

Froglet

We are wary after being messed about by our last advisor.Not checked on our pensions for some time so thought with retirement approaching it would be an idea just to check on whether they were in safe investments.He has five different pension schemes within three pension companies so not straight forward,but i am fairly astute on most aspects ,and can keep track of most of them online now.

Just wanted to know if others in the know agreed with what we have been told or whether to steer clear.He has been an advisor for many years and is local,so has a name to keep up,and seems to have a good business going.

dunstonh

General rule of thumb (which is not 100% but a good guide) is that you do not take your pension until you need it.

Just wanted to know if others in the know agreed with what we have been told or whether to steer clear.He has been an advisor for many years and is local,so has a name to keep up,and seems to have a good business going.

he may have reasons for justification. However, to be on the safe side, check to see what his plans are for next year and beyond. A clue may be in his initials after his name. If it is DipPFS then he has the required qualifications to trade beyond next year. If it is certPFS then they will no longer be sufficient. He may be part way to qualifying or he may be doing his last 9 months before calling it a day. Over half the advisers are now qualified apparently. It is also expected that around 30% will be leaving. That leaves 20% who have yet to get qualified but intend to stay. Advisers are often asked about qualifications and plans for after the retail distribution review. So, asking him should not phase him one bit.

One justification may be that he thinks that getting an annuity rate before unisex rates come in could be worthwhile and that four years of income will more than make up for a higher annuity rate in four years time. Indeed, there have been a number of periods in the last twenty years where that has worked out better. So, there is the possibility of justification. Another thing to ask is how he has calculated it. i.e. if you are using that as a potential justification then you need to know the assumed figures and the breakeven point. if the breakeven point is age 70 then it doesnt look attractive. If the breakeven point is 98 then it may look more attractive.

Aegis

dunstonh wrote: »

General rule of thumb (which is not 100% but a good guide) is that you do not take your pension until you need it.

Especially not if you're thinking of taking an annuity!

Froglet

dunstonh wrote: »

General rule of thumb (which is not 100% but a good guide) is that you do not take your pension until you need it.



he may have reasons for justification. However, to be on the safe side, check to see what his plans are for next year and beyond. A clue may be in his initials after his name. If it is DipPFS then he has the required qualifications to trade beyond next year. If it is certPFS then they will no longer be sufficient. He may be part way to qualifying or he may be doing his last 9 months before calling it a day. Over half the advisers are now qualified apparently. It is also expected that around 30% will be leaving. That leaves 20% who have yet to get qualified but intend to stay. Advisers are often asked about qualifications and plans for after the retail distribution review. So, asking him should not phase him one bit.

One justification may be that he thinks that getting an annuity rate before unisex rates come in could be worthwhile and that four years of income will more than make up for a higher annuity rate in four years time. Indeed, there have been a number of periods in the last twenty years where that has worked out better. So, there is the possibility of justification. Another thing to ask is how he has calculated it. i.e. if you are using that as a potential justification then you need to know the assumed figures and the breakeven point. if the breakeven point is age 70 then it doesnt look attractive. If the breakeven point is 98 then it may look more attractive.

Thanks for that detailed explanation

These are the letters after his name

ACIB, DipPFS, CeMAP Independent Financial Adviser


and yes,the point about the unisex rates and having the annuity for 4 years early is what he said.His breakeven point was about 80ish if i remember correctly.

What we were most puzzled about though was the avoiding paying tax.I know you can reinvest part of the cash lump sum ,but he was saying that the actual income you could avoid paying tax also by reinvesting in a pension,either adding to the one i have or starting another.Can you quantify that?

Linton

Froglet wrote: »

Thanks for that detailed explanation

These are the letters after his name

ACIB, DipPFS, CeMAP Independent Financial Adviser


and yes,the point about the unisex rates and having the annuity for 4 years early is what he said.His breakeven point was about 80ish if i remember correctly.

What we were most puzzled about though was the avoiding paying tax.I know you can reinvest part of the cash lump sum ,but he was saying that the actual income you could avoid paying tax also by reinvesting in a pension,either adding to the one i have or starting another.Can you quantify that?

One thing you can do if you have an annuity and dont need the income is to reinvest it (as long as its less than your earned income) in another pension. You then get the tax relief off your earnings (though you are still paying tax on the annuity) and another 25% tax free.

dunstonh

What we were most puzzled about though was the avoiding paying tax.I know you can reinvest part of the cash lump sum ,but he was saying that the actual income you could avoid paying tax also by reinvesting in a pension,either adding to the one i have or starting another.Can you quantify that?

I've seen it done but I am not keen personally. Yes you get tax relief putting it back in the pension but you are giving up that money again. It it was to rebalance poor spouse provision then that could be viable. It is possible that what he suggests can provide more but the amount is likely to be small (if going back in your name). You also have the risks of reduced death benefit (pensions before commencement pay the lump sum to your beneficiary tax free - after commencement you only get the the terms of the annuity. e.g. 50% spouse if you chose that option).

It is also a judgement call. The reason it worked so often over the last 20 years is that annuity rates were in decline. So, delays did not benefit you. However, around 2005 annuity rates after that started to rise each year until the credit crunch. With low interest rates/gilt yields, annuities have fallen to all time lows. They are low now because of those. If in 4 years time if you think interest rates and gilt yields will be higher then delaying until then would likely be better. It is highly unlikely they will be any worse as there is little scope left for any further fall. Indeed, rates has risen slightly a couple of times over the last month. That could be the bottom hit or a false dawn.

A lot of it is a balance of risks and pros and cons. I can see the argument being presented to take it early. I am not necessarily persuaded by it in this current part of the economic cycle based on what said so far. There is no big positive that stands out to me to counter the negatives.