Should OH buy annuity now?

kemmyjoe

Hello, my OH's pension plan matures soon when he'll be 60. He had no intention of taking it until 65 but has been made redundant from Feb and so far unable to secure another job even though he has had interviews. We think ageism is a reality. We had an informal chat, free, with an IFA and he kept saying that my OH should take the 25% now and buy an annuity with a 10 yr guarantee now (as the guarantee wouldn't cost much). He said that by waiting 5 years he's lost 5 years payments, and could invest the payments. He said to put the 25% into savings. If he did that he would have £41750 left to buy an annuity. He said get a single level income, based on that I seemed to be already covered when I retire. My OH can't really afford to keep up the £90 monthly payment whilst unemployed. We don't know if he'll get another paid job soon. I think as this first visit was free he didn't really go into any tax implications later, or what would happen if OH chose a specific date, say another 2 years to buy the annuity, and whether a MVR would apply in 2 years. He said the pension would not be taxed as OH is not working. OH doesn't know what to do, and is hopeful that he will find work, and if he does then the pension will be taxed. I am going to get quotes from providers.

Any advice would be appreciated, any pros and cons. He has no savings to speak of and no mortgage.

jamesd

The main options when taking pension income are first the decision on how much lump sum to take, then whether to buy one or more annuities or to leave the money invested and take an income from the investments using income drawdown.

Now is in general a bad time to be buying annuities because fiscal easing has reduced their rates and that short term effect will result in lower payments for life if he buys one now.

Some older pension plans have something called a guaranteed annuity rate. That can pay out significantly more than an annuity purchased on the open market so it's vital to know whether there is one or not.

What is the £90 payment? Into the pension?

If there is no guaranteed annuity rate then it may well be better to use income drawdown. That will let him take an income now but stop taking it if he gets another job. The trouble with income drawdown is that it requires some knowledge of investments from the person running it. For an IFA to do it, the value of his pension pot is on the small side.

A ten year guarantee is pretty cheap and will ensure that the annuity pays out for ten years even if he was to die the day after buying it. The amount that you get when you buy an annuity in general increases the older you are when you buy it. Buying an annuity at 60 typically isn't a great deal.

Pension income is taxable and is operated as PAYE. The income from a pension pot of £41,700 probably wouldn't exceed the personal allowance so the effect would be no tax until he's working again or gets the state pensions.

The thinking of the IFA was probably along the lines of:

1. Your husband doesn't know much about investments so can't really manage drawdown himself.
2. The cost of an IFA to manage the drawdown would probably be too high for the amount involved.
3. Your husband may not be familiar with the way investment capital values move up and down and may not be happy with that.
4. Your husband may have said that he wants low risk, which would automatically eliminate most investments unless he's more specific about how much up and down of capital values he can accept.
5. Which leaves buying an annuity because that avoids the need to know about investments.

While an annuity probably isn't best overall, it may be best if your husband doesn't know about investments.

Charges for IFAs vary and there's no harm visiting a few from unbiased.co.uk to see what they say.

CannySaver_2

Hi

I'd agree with a lot of what James said.

Firstly one wonders why the IFA is pushing your OH into buying an annuity now, the cynic in me thinks it might be because this is the only way of him earning a commission, although I'm sure that isn't the case .

Although it might have been interesting to see what advice he or she gave if you'd have paid them a fee for their time, meaning that their advice was completely unbiased.

Now is not a great time to be buying an Annuity as James said, QE has pushed down gilt rates, which in turn has pushed down annuity rates. Furthermore increased life expectancy has pushed down annuity rates for years now and Solvency II plus the European ruling on gender discrimination have also not helped.

I guess there are a number of stages to this.

Firstly if your OH stops paying the £90 per month does that make your household finances balance between income and expenditure?

If it does I'd suspend payments, maybe take a review of the pension in terms of charges / performance but certainly not take any tax free lump sum or income from it.

Secondly if you do need some income in the sort term until your OH finds a job then do you have any savings or investments you could use? I'd make the pension my last 'port of call' for income or capital as it really should be there for retirement and the death benefits, if your husband were to die early, are so much better from an unvested pension.

If you really need some money from the pension to tide you over, in this case, I think there is a reason to consider Income Drawdown as an option. I also think you might find an IFA to look after it for you.

Income Drawdown is usually reserved for people with over circa £100,000 in their pension (no particular reason these days, it's an old rule of thumb which dates back from a time when Income Drawdown plans were more expensive then Personal Pensoons) however in your case the need for flexibility trumps this 'rule', in my humble opinion.

Income Drawdown would allow your OH to take a tax free lump sum and an income, until such time as he returns to work, he can then 'turn off' the income and let the fund build until he actually retires, when he can either buy an Annuity or turn the Income Drawdown tap back on.

I think you would probably find an IFA to deal with this on an Income Drawdown basis as managing the money in an Income Drawdown plan shouldn't be much more onerous than when an IFA manages money in a Personal Pension; it also doesn't have to carry any investment risk if you use a combination of a SIPP and a SIPP deposit account although in that case you do need to be aware of inflation.

The charges for Income Drawdown, provider, fund manager and IFA, don't need to be any greater for Income Drawdown than they do a Personal Pension.

In summary:

1. Only use the pension if you really have to
2. If you do need to use the pension then take as little as possible for as short a time as possible
3. Seek advice from at least two other IFAs before you dive into an Annuity, which I feel is wrong for you

Hope this helps.

The Canny Saver

jamesd

Yes, that £100k is from when costs were higher, now the cost can be as little as £75 every three years for the regular GAD calculations needed by drawdown. An IFA may still be constrained by it being a higher investment risk option than an annuity, though, and may feel unable to recommend it. I'm not, I can see that ti's the product that seems to bes fit the circumstances and since I'm not an IFA I don't need to worry about the regulator.

if this is interesting then it's something that he may want to discuss with the IFA in a phone call before meeting to ensure that the IFA is at least willing to consider it. That may save time and money for everyone.

Loughton_Monkey

Taking the pension now has the following advantages:

1. It would provide [needed?] cash and income now. You need to decide how essential this is.

2. If he doesn't get a job, then he has a window of 5 years or so during which much of the income would be tax free.

Disadvantages are:

1. This is not the best time to buy an annuity. Rates are very low. Although mortality might continue to decrease, interest rates (the other 'bit' involved in annuity rates) can really only go up over time.

2. Locking it in to an annuity now denies him the opportunity for further growth of the total fund. Yes, his 25% could grow just the same [if he doesn't spend it, and invests it in funds] but the other 75% will have been 'locked in' to a rather lacklustre fixed interest vehicle.

If he does get another job, maybe gets substantial benefits, then the extra annuity income would almost certainly be fully taxable.

But I suggest you read all the advice above, and make your own personal decisions on the overall 'shape' of what to do. Invoke the pension or not? Drawdown or Annuity? Lump sum or no lump sum?

What you should avoid doing is allow your advisor to draw you into the relative 'trivia' of the details of the annuity [like 10 year guarantees..] until you have made the important decision(s).

kemmyjoe

Thank you so much for replying everyone. My OH, after the meeting was all for taking the pension now, but I was against this, and now that he has read your comments, is in agreement with you and me. The decision now is whether contributing £, which with govnt't tax relief makes it £118 a month, should stop or be worthwhile for the next 5 years; that would be another £7k plus-would he gain that £7k back. I suppose he could stop and start again if it was worth it, or reduce the monthly payment. Can anyone guesstimate how much difference it would make to the final fund. He has had a few days work most weeks given by friends or word of mouth and is not on JSA. It is not ideal as he nevers knows if he is going to work from one week to the next. I will be able to pay the bills for a while. I am hopeful that he will find some type of work even if it's at minimum wage.

You say annuity rates are at an all time low - is there a site I can compare past annuity rates so that I can show him.