Need a little guidance with private pension pot

iamthedude

atush wrote: »

Yes she would get 55% if she took cash, but 100% if she bought an annuity or went DD. It does not have to be joint, a spouse can inherit the WHOLE pot, but other beneficiaires such as you only 55%.

Ok, just so I understand, to get 100% of the hypothetical "what's left over", she would have to buy another annunity or go into drawdown. I'm sorry, I don't understand the drawdown fully at this point. How does it work? As far as I know, drawdown is taking an initial 25% lump sum and then having the annual trickle out of the pot - is this right and would the same thing just happen again. Right now I am thinking the drawdown is his initial best option?

McKneff wrote: »

If he's still working he wont need the gym, are you trying to kill him off
Have you actually asked him if he wants to go to the gym.

Ha! He's still active and with him being on the Lifeboat it kept him busy over the years, but he'll be winding that down soon too. He's been an active guy all his life so I don't want that to dry up. We're all agreed he just needs to lose a couple of stone and if he's physically doing less he'll only put more weight on. He actually really enjoyed it, I gave him my old iphone and some headphones and he was away. Just need to keep that up now!

jamesd wrote: »

I'm unsure why he's been advised to leave the money in the pension pot. That's not required. Taking it now via income drawdown has two disadvantages and several potential advantages:

He's got his money in 4 places (I think) right now. The IFA has suggested consolidating it in one place. His pot is actually a little over £49k. If he took a guaranteed income today he'd get just shy of £2k a year on a single policy, if it was joint, the amount would be 0.5% less and lower again because mum is 2 years younger than dad.

I don't know if there are any limitations on how he has his money saved now. By the sounds of it, the IFA had to jump through hoops to get him into this plan so I assumed it was his best option. As I say, I'm navigating new territory here, it's all a learning curve for me this.

jamesd wrote: »

What is a "one plan and that will attract 4% minimum over the next 5 years"? Such plans aren't normal investment options for pensions and cause me to wonder if the advice he's receiving is good. How is he paying the IFA, commission or flat fee?

If dad hands over his £49k now, the provider will accrue a guaranteed 4% minimum per year.The IFA has stressed that's the worst case scenario. With regards to the IFA payment it's capped at 3% of the pot so around £1,500. It can either be paid as a flat fee or come out of the pot as in commission.

Linton wrote: »

If so, your calculations suggesting a break even age of 94 are way out.

If his £49k attracts 4% for the next 5 years (it's not compounded), that's a final pot of £58,800 when it's crystalised. If he's getting a guaranteed £2,400 a year for life, that's 24.5 years... and he'd be 70 when it starts paying out. That's where 94 comes from.

Linton

iamthedude wrote: »

If his £49k attracts 4% for the next 5 years (it's not compounded), that's a final pot of £58,800 when it's crystalised. If he's getting a guaranteed £2,400 a year for life, that's 24.5 years... and he'd be 70 when it starts paying out. That's where 94 comes from.

Yes but IF the £2400 is index linked and inflation averages 3% by the time he is at his life expectancy of 86, the annual income will have increased to £3851. By the time he is 94, his income wont be £2400, it will be £4879.

So simply dividing 60000 by 2400 is meaningless.

iamthedude

Linton wrote: »

Yes but IF the £2400 is index linked and inflation averages 3% by the time he is at his life expectancy of 86, the annual income will have increased to £3851. By the time he is 94, his income wont be £2400, it will be £4879.

So simply dividing 60000 by 2400 is meaningless.

Well that would go someway to making me feel better about things if he was getting those marginally larger payouts every year.

I can't find anything in the IFA's proposals to say it will increase in line with inflation. In fact when I put it to the IFA that he would need to reach 94 he agreed with me and when I asked him if it was likely he'll ever see the full return on his pot he said no?

That's what prompted me to start this thread.

Like you say, if he did receive a 3% increase per annum, by the time he is 87 he'll have maxed out his pot.

I guess I need to another chat with the IFA :undecided

atush

Or maybe a new IFA?

jamesd

iamthedude wrote: »

Ok, just so I understand, to get 100% of the hypothetical "what's left over", she would have to buy another annunity or go into drawdown. I'm sorry, I don't understand the drawdown fully at this point. How does it work? As far as I know, drawdown is taking an initial 25% lump sum and then having the annual trickle out of the pot - is this right and would the same thing just happen again. Right now I am thinking the drawdown is his initial best option?

AFter taking a lump sum or not, the next step is how to take an income. There are two main options, buying an annuity or using income drawdown. Buying an annuity spends the capital to buy an ongoing income. Income drawdown leaves the money invested in normal investments and takes an income from the income they produce and eventually from reducing the capital. The level of income from income drawdown can be anything from 0 to the GAD limit.

I agree that income drawdown is likely to be his best option.

iamthedude wrote: »

He's got his money in 4 places (I think) right now. The IFA has suggested consolidating it in one place.

Consolidating is probably a good idea, except for any workplace final salary schemes he might have.

iamthedude wrote: »

I don't know if there are any limitations on how he has his money saved now. By the sounds of it, the IFA had to jump through hoops to get him into this plan so I assumed it was his best option.

Not usually that much in the way of tough hoops, just sending off some forms typically, then chasing companies with slow administration.

iamthedude wrote: »

If dad hands over his £49k now, the provider will accrue a guaranteed 4% minimum per year.The IFA has stressed that's the worst case scenario. With regards to the IFA payment it's capped at 3% of the pot so around £1,500. It can either be paid as a flat fee or come out of the pot as in commission.

Such plans aren't normal and we don't have enough information about what this is to know if it's a good or bad product or deal.

A 3% cap isn't unreasonable.

mgdavid

OP - scan-reading the thread, you might be best to go back to basics and read up thoroughly about Income Drawdown, and the various flavours of Annuity. I think many replies have assumed you know more than I think you do; apologies if I'm way out...

(and I also think you probably need a new IFA...)

iamthedude

jamesd wrote: »

AFter taking a lump sum or not, the next step is how to take an income. There are two main options

I understand the two options, although I am unsure of the GAD limit. I had a quick look at the government's website and I downloaded the percentage charts but it doesn't make a lot of sense right now. If anyone could give me a real quick breakdown of this I'd very much appreciate it!

It might also help if you know what plan he's being recommended. As a newbie I can't post links so please copy and paste:

metlife_co_uk/uk/Documents/RP/0204_RP_client_brochure_9.pdf

The annuity option will give him £2,423.24 / year when he's 70 if he puts his £49k with them now... If he started it today he would receive £1,966.92. That's the difference of the guaranteed 4% over the next 5 years. The IFA said it's a guaranteed yearly minimum income, so it could go up slightly. This will be dependant on the market. Inflation came up in an earlier post, that's a question I will ask later today.

jamesd wrote: »

Consolidating is probably a good idea, except for any workplace final salary schemes he might have.

He's been self employed for the last 20 years. It's pretty much everything he's saved.

jamesd wrote: »

Not usually that much in the way of tough hoops, just sending off some forms typically, then chasing companies with slow administration.

There is a £50k minimum limit with MetLife plus he has saved in 4 different places. So yes, a bit of form filling plus he's just under £1k short of the £50k minimum value but the IFA has spoken with MetLife etc.

jamesd wrote: »

Such plans aren't normal and we don't have enough information about what this is to know if it's a good or bad product or deal.

I'm a bit hesitant because after searching on MSE forums, the MetLife plan isn't, how shall I say, given great recommendations by the users?

mgdavid wrote: »

I think many replies have assumed you know more than I think you do; apologies if I'm way out...

No need to apologise, it is all new to me and I'm trying to do what I can while doing what I should be doing. Dad doesn't do finance.

I think I understand annunities at this point - you pass the money to a provider who in return give you a guaranteed income for the rest of your life. You can build guaranteed payments into it if you die early too, generally between 1 and 10 years, but doing so will reduce the annual payout.

The drawdown option means leaving the money invested and you draw it down down over the years but there are limits to what you can withdraw annually. I realise there is an element of risk as the pot can fluctuate up or down.

I think I'm right in saying he can take 25% lump sum tax free at the beginning with either option and doing so will obviously reduce his payouts with either the annunity or the drawdown.

jamesd

There's a table showing the effect of the GAD limit for males in this post. The current gilt rate is 2.75% so use a middle value between the 2.5% and 3% rows. Women of the same ages get a little less because of their longer life expectancy. The calculation is done again at least every three years and the new value is used for subsequent income, so it's expected to increase regularly over time. Though the ability to actually sustain that will depend also on the investments producing enough income or growth to support it, currently easy enough to arrange.

I'm not keen on that MetLife product. I expect the costs and charges involved to eliminate most of the benefit and leave people less well off. As Linton noted, the income level is so low that it looks more like what would be paid for an inflation-linked annuity than a normal level annuity, but it is just providing a level guarantee. What's happening in part is that the complexities of the product are concealing the costs, which become more visible once the annuity rate is compared to what can be obtained in other ways.

It's easy to get a DIY guarantee. Just stick some money into a savings account, say three years worth of income. The chance of that much being depleted enough to prevent payouts of the initial amount is low. You'd set up the investment income to go into the same savings account and have the income you spend sent from there to a current account by standing order each month. Income levels from investments also tend to vary much less than capital values, so in practice the variation in income is likely to be low, with gradual increase trend over the years. This really only applies to income drawdown, no need with a standard annuity.

For an IFA the plan has the advantage that it can be pitched as a low risk option that will be attractive to many people if it is described in that way without comparison to the money paid by alternative ways of doing things to provide a context for the costs and income levels provided.

martinwh

This sounds like the Metlife plan. I'd steer clear of it. The charges on the Metlife Retirement Portfolio are outrageous, and the income guaranteed is pretty low compared to an annuity or the income that can be taken on normal drawdown. He could get much better income from a traditional annuity or drawdown. The only people doing well out of the Metlife retirement portfolio are the IFA and the Metlife sales reps.