Need a little guidance with private pension pot

iamthedude

Hi All,

I'll try and keep this short.

My dad turned 65 recently and he and my mum are both claiming the state pension. He's also saved around £50k through several pension pots over the years.

Obviously they're now at a time where they want to draw that money down.

What's surprised me though is just how inflexible private pensions appear to be - I didn't know anything about them, I'm just learning now and I not the impressed to say the least...

We've been advised that the long and short of it is he's highly unlikely to see the money HE'S saved! Not unless he beats the odds and lives until he's at least 94 - I got him down the gym last night, but I'm not sure even if I fed him oats and salad and got him to the gym every night for the remainder of his days that that'll be enough to counteract the past 20 years of his extra curricular Friday night activities, but I digress.

We've got a financial advisor to provisionally consolidate all his pension plans and to put them in "one plan".

We were all shocked to learn though that he's been advised to leave his private pension alone until he really has FULLY retired. He's taking the state pension and working, although he has eased his foot off the pedal a bit now.

We've been advised to put it in one plan and that will attract 4% minimum over the next 5 years... So by the time he's 70 he'll have roughly £60k in his pot.

An annuity then will provide him with £2,500 a year for life... so to exhaust £60k he'll need to live another 24 years = 94!

What's infuriating me right now is that any remaining money left in his pot will just go to the pension provider!?! So if he turned on his pension when he's 70 and he croaks it at 75, he'll have had a whopping £12.5k out of a £60k pot and the remaining £47.5k will disappear into pockets of the masters of the universe. How can that be fair?

Another alternative has been suggested...

He can take a lump sum - 22% when he's 70. That will give him £13k and from then on a measly payout of around £1,400 a year! If he croaks it before mum does, she'll get the remaining pot less 55% tax!... So on the face of it, this sounds like the marginally longer of the short straws, but damn, wouldn't he have been better off just saving the money as he went along? It sounds like the biggest pointless "money saving" activity I've ever heard of.

What I want to know is, is this typical? Is this really, give or take, the best he can expect if he passes over his consolidated £50k lump sum over to a pension provider now?

Does it sound ridiculous, typical, more-or-less right? ANY input would be GREATLY appreciated because we're all a bit :shocked: right now.

Thank you in advance and I'm sorry it wasn't short :undecided

atush

We were all shocked to learn though that he's been advised to leave his private pension alone until he really has FULLY retired.

Why are you shocked? If he is still working and gettting a pension he will be paying tax. So if he doesn't need the other yet, he should leave it to grow until he does (so maybe he will pay less tax on it.

He can take 25% either now or at whatever age he crystalises it. Or if he has savings, he might prefer to take an income from the full pot.

He does not need to buy an annuity, he can use Drawdown instead. The DD can be inherited by your mother should he die. She should get 100% of it if she uses it to provide an income.

iamthedude

Thanks for the reply atush.

Maybe I could have worded it better. No one's shocked he's paying tax now, that's a given.

What we were shocked at is what we've been told about how the annuity AND the drawdown worked.

With the annuitiy he would need to reach 94, which I think we can all agree is unlikely given national statistics, to max out what he's saved over the years. I do take on board though there were tax saving efficiences while he was saving that money, but still 94 is what we were shocked at.

With drawdown, lets say he reaches 85... he'll have a £13k payout + 12 x £1,400 = roughly £30k... mum gets the remainder less 55% tax. So she'll lose roughly £13.5 that way.

Am I missing something, because to me it doesn't seem fair? Another thing that grinds a bit is that these pension providers have "had" dad's growing pot over the years with the a very good idea as to when they would need to start releasing money. It just sounds like a very big win-win for the pension providers?

When you say...

atush wrote: »

He does not need to buy an annuity, he can use Drawdown instead. The DD can be inherited by your mother should he die. She should get 100% of it if she uses it to provide an income.

If dad/mum could have access to 100% of the pot, that would be great, but that's not what we've been told. If he uses the drawdown option and he dies, mum gets the remaining pot less 55% tax, does that sound typical?

Thanks again.

Linton

From the figures you gave I guess that the £2.5K pension includes a benefit for your mother on your father's demise, so the comparison is not just when your father dies.

If someone dies early the money doesnt go to the "masters of the universe", it mainly goes to pay those who die late. That is the whole point of an annuity: to share the real financial risk of old age which is to live an unusually long period.

The final point to bear in mind is that life expectancy is increasing rapidly. Current statistics suggest that someone aged 70 in 2017 on average will live to perhaps 86.

Final point - the 55% tax on drawdown only applies if your mother takes the pot as cash. It can instead be used to provide an annuity with no extra tax charge beyond the normal personal tax on the income.

iamthedude

Thanks for your reply Linton.

Linton wrote: »

From the figures you gave I guess that the £2.5K pension includes a benefit for your mother on your father's demise, so the comparison is not just when your father dies.

From what I recall there really isn't a lot in it, mum's a couple of years younger than dad. I think the IFA said it would be slightly lower with a joint plan.

Linton wrote: »

If someone dies early the money doesnt go to the "masters of the universe"

Well it certainly feels like it. I take on board your point about people living longer and that they will in effect have a larger payout than what they've saved, but I am shocked that it is 94... And perhpaps one of the ironies is that dad does a lot of contracting work in retirement homes and sees that most folk pass on way before they reach their 90s... And it still makes me think he'd have been better just saving the money over the years.

It reminds me of his private health insurance... how he paid into it for 30 years but when he had to make ONE claim in all those years (for a month) the company did everything they could to limit (not avoid) a payout.

Linton wrote: »

Final point - the 55% tax on drawdown only applies if your mother takes the pot as cash. It can instead be used to provide an annuity with no extra tax charge beyond the normal personal tax on the income.

I guess it depends on their health in the coming years, but I wasn't clear that she could take another annuity so thanks for that.

iamthedude

Just another thought...

Lets say the average in 2017 is 86 and they've offered dad terms that would mean he would need to reach 94 before I maxed out his pot, I'm assuming that it's in those 8 years where the pension providers make their money?

atush

And it still makes me think he'd have been better just saving the money over the years.

No, for the simple reason he would have saved less. As he wouldn't have had tax relief and an employers oncontribution. And he probably would have saved into cash instead of equities so would have had a smaller pot.

Your fathers 50K pot would have been a 25K pot or even less perhaps?

so, he is better off having saved into a pension, and as I and Kinton said before your mother can inherit 100% of the DD pot left over if she doens't take it in cash.

McKneff

Its all swings and roundabouts, for the insurance companies too.

The insurance people have to make some money or there would all go out of business.

If everybody who paid into a pension lived till they were 99 they wouldnt make any money at all and still go out of business.

They are also taking risks.

Tell him to get all the money he can now and go on a 6 month world cruise. With your mum of course.:D

cte1111

Just my thought - I personally would not consolidate as it is putting all your eggs in one basket, e.g. if your pot is all with one provider, then if they go bust it is all gone, where as if you keep it spread out, the risk is also spread.

DavidLaGuardia

iamthedude wrote: »

I guess it depends on their health in the coming years, but I wasn't clear that she could take another annuity so thanks for that.

OR she could do drawdown with it

iamthedude

atush wrote: »

No, for the simple reason he would have saved less. As he wouldn't have had tax relief and an employers oncontribution. And he probably would have saved into cash instead of equities so would have had a smaller pot.

Well, I don't know if that's true.

Ok, he'll have had tax relief, I understand that, but what if he'd put it into bonds on an ISA? I know ISAs weren't around 20 - 30 years ago when he started putting money away, but he could have put it in over the last 10+ years. I know I'm playing shoulda, coulda, woulda game though there, but there's more flexibility with ISAs than with pensions... Wish I'd known more about pensions earlier - I have an enquities ISA.

He's also self employed so there was no other contribution.

I don't know if his current pot of £50k includes any money he's made from investing in pensions? If it does, that obviously makes a difference. From what I can tell, that money is what he's saved, he's not gained financially by having saved with X and Y. I could be wrong on that though.

atush wrote: »

he is better off having saved into a pension, and as I and Kinton said before your mother can inherit 100% of the DD pot left over if she doens't take it in cash.

I understand that but it's also unlikely she'll live to 94 too. It so morbid talking like this, but she's already got issues at 63 and I expect he will probably outlive her.

From what's been said (and the IFA has said too) that she's entitled to the "what's left" minus 55% if she took it as a lump sum. If she wanted an annuity she could get the 100%... - That is right, isn't it?.. If so, again it's a question of guessing the longer between the short straws.

McKneff wrote: »

Its all swings and roundabouts, for the insurance companies too.

The insurance people have to make some money or there would all go out of business.

True, you could say the same for casinos too

McKneff wrote: »

If everybody who paid into a pension lived till they were 99 they wouldnt make any money at all and still go out of business.

If everyone lived until 99 based on my dad's quotes they'd defo be out of business!

I guess my beef is the disparity between the average of when people die and the length of time a person would have to wait to realise what they've saved. If the average in 2017 is 86 they'll still be plenty of people dying way before they've hit their 80s... I would wager they'll be more people dying in their 80s than living into their 100s, which really can only be to the benefit of the pension providers.

McKneff wrote: »

Tell him to get all the money he can now and go on a 6 month world cruise. With your mum of course.

If he took all he can now he'd get clobbered for tax cause he's still working, plus he wants to save that bit more over the next 5 years, I just hope they live long enough to enjoy it. They might not have chosen the best ways on how they've saved, but they've worked hard enough to save what they've got.

Funny you mention a cruise, he volunteers for the Lifeboat and loves the sea, mum gets seasick getting out of bed, but they can both still equally wind each other up

Cheers