Pointless pension?

usignuolo

My OH has recently had a quotation from a small pension plan to which he contributed for a few years in a particular company. He ceased contributing about 5 years ago and the pot now contains £11,000.

The quote assumes he will take a £2,750 pension pot leaving £8250 for an annuity. The yearly rates quoted for this are from age 65: single life level lifetime annuity, 5 year guarantee, £376; single life level lifetime annuity no guarantee, £377.
,
It really doesn't seem worth it, taking a pension that is, for such a derisory amount or am I missing something? How much is the maximum lump sum he could take?

worried_jim

It is still worth more than if he had just saved money into a savings account as he has tax relief on the £11k.

usignuolo

It says on the document "Your Annuity will be treated as PAYE" or if you chose the "Triviality" option and take a lump sum, of the whole amount, tax will be deducted from this amount.

Where is tax saving?

Linton

Has he any other pensions? If so he could amalgamate them. If he has a pension with his current employer it may be possible and worthwhile to move the money over.

The maximum lump sum is 25% - hence the £2750 in the offer. If he is retiring now and has a total value of £18K or less across all his pensions the whole lot minus tax can be taken as a lump sum. However that would be a very small compensation for what would be an impoverished old age.

Linton

usignuolo wrote: »

It says on the document "Your Annuity will be treated as PAYE" or if you chose the "Triviality" option and take a lump sum, of the whole amount, tax will be deducted from this amount.

Where is tax saving?

Under triviality rules you only pay tax on 75% of the lump sum, 25% is tax free.

usignuolo

He does have some other small pension pots and together they come to over £18k.

The thing is if he takes a pension of £375 pa in exchange for a lump sum of around £8250, he would have to live for another 25 years, to take it in total, without any interest on the amount in the intervening years, and it would make him 90 when it ran out.

Surely he might just as well take a lump sum, if there were no restrictions on doing this. What is average male life expectancy in the UK? .

somethingcorporate

http://www.statistics.gov.uk/hub/population/deaths/life-expectancies

You need to look at cohort life expectancy (not just average).

jem16

usignuolo wrote: »

He does have some other small pension pots and together they come to over £18k.

In which case he cannot exercise triviality.

Maximum lump sum is therefore 25%.

usignuolo

Yes I appreciate that, my point was that it makes it look like there is no point in saving for a pension if the fund itself pays out less annually than you could achieve by saving the same sum yourself. In OH's case he would have to live to be 90 in order to break even on this pension pot sum. Life expectancy for men in the UK is 78, so the pension company would be quids in if he died then and still in profit all the way to him hitting 90. How many men can expect to live to over 90 in the UK - I expect it is pretty small as a percentage of their "cohort".

dunstonh

my point was that it makes it look like there is no point in saving for a pension if the fund itself pays out less annually than you could achieve by saving the same sum yourself.

That isnt probable though.

1 - free money from employer makes the pension fund bigger than alterantives
2 - tax relief on contributions makes pension fund bigger than alternatives.

whilst you dont have to buy an annuity, annuity rates are poor presently due to low interest rates. However, a 65 year old can still get around 6% (standard rate). That is better than savings.

So, there are plenty of reasons to use a pension as well as for not using one.

How many men can expect to live to over 90 in the UK - I expect it is pretty small as a percentage of their "cohort".

Depends on how old they are now but more than you seem to realise.

In OH's case he would have to live to be 90 in order to break even on this pension pot sum.

Not really. That pot is higher than savings accounts would have been as he wouldnt have had tax relief (or possibly an employer contribution) on those. So, you need to compare what the savings account would have been. Looking at the current fund value is not the correct thing to use for break even point comparison.

Also, the annuity rate seems very low for a 65 year old. It is only 4.5% which is lower than the annuity rate I would expect for single life male, level basis.

jamesd

usignuolo wrote: »

Life expectancy for men in the UK is 78

Cohort life expectancy at birth is currently 90.5 years for men. For 65 year old men it's 86.3[/URL]. That's half of them expected to live to that age or older.

usignuolo wrote: »

How many men can expect to live to over 90 in the UK - I expect it is pretty small as a percentage of their "cohort".

Close to half who are 65 now, considerably more than half of those who are being born now.

For women it's a few years older.

usignuolo wrote: »

am I missing something?

Yes. It didn't cost him £11,000 to get £11,000 in the pension pot. Using today's basic tax rate instead of the higher ones in the past he'd have paid net something like £8,800, ignoring any part that is from an employer or NI rebates. Of that £8,800 net cost he now gets back cash of £2,750, for a net cost after that of £6,050.

In the annuity he'd get about 4.56% on the 8,250 as the £376.
On the £6,050 alternative he'd need to get 6.2% to get the same £376.

Of course, the employer probably did pay in something, quite likely half of it.

usignuolo wrote: »

How much is the maximum lump sum he could take?

25%.

Now isn't a good time to be buying annuities. He's also well below the optimal age to be buying one, which starts somewhere older than 75.

He doesn't have to buy an annuity, he could consider drawdown though this amount is really too low for that to be a great deal. If he has other defined contribution pension pots he could merge this into them.

Does he have workplace defined benefit pensions plus state pensions that will pay out an income of at least £20,000 in total? If the answer is yes he can use Flexible Drawdown and take out 100% of this pension pot at one time if he likes. His current pension company may not allow this, the solution in that case would be to transfer to one that does.

Does he really have pension pots, including the full capital value, not just income, of all workplace pensions that only add up to £18,000? or as much as £4,000 over that? If the answer is yes then he qualifies to use the triviality rules to take all of them as a lump sum. the normal limit is £18,000 but two pots of up to £2,000 each can be taken before the £18,000 is calculated and in addition it's possible to deliberately incur charges to get a little below £18,000.