Age 53 Pension Value £29161 annuity offer £791pa?

philng

Wife has just requested pension figures from her current works DC pension scheme.

Pot value is £29161 but the annuity offer is just £791pa. This equates to just 2.7% pa of the value & increase by RPI or 5% as a max. For this lose the whole pension pot.

Why are the figures so low as I am sure I could get a return of 5% by investing wisely if I had alump sum of this amount & still have ownership of the capital.

philng

Additionally they are only allowing a max lump sum of £1711-why not the 25%?

Linton

The figures are so low because the pension company has got to provide guaranteed income no matter what happens to the economy. The only way of doing that is to buy government backed bonds which currently offer a very low rate of interest. Your "wise investment" certainly couldnt guarantee the income.

Also, 53 is very young to buy an annuity. Your wife could easily live another 40 years. In that 40 years even with controlled inflation the cost of living could rise 2-3 fold. In fairly recent times of course inflation as risen to 15% or so annually. Delaying buying an annuity will provide a better return as well as providing extra years to allow the pot to grow. Actually I am a bit surprised she could actually get an annuity at 53, the normal starting point is 55.

As to why the limited lump sum, I dont know. You would need to consult the scheme's rules.

dunstonh

Pot value is £29161 but the annuity offer is just £791pa. This equates to just 2.7% pa of the value & increase by RPI or 5% as a max. For this lose the whole pension pot.

Seems quite reasonable given the timescale.

Why are the figures so low as I am sure I could get a return of 5% by investing wisely if I had alump sum of this amount & still have ownership of the capital.

can you get an annually increasing rate by RPI for life that beats that?

philng

Just thinking if £29k invested on stock market with 4% dividend return would equate to £1200 start up payment PLUS any future growth of investment.

Would have to live a long time for yearly payments of £791 + RPI to repay the £29k.

Linton

philng wrote: »

Just thinking if £29k invested on stock market with 4% dividend return would equate to £1200 start up payment PLUS any future growth of investment.

Would have to live a long time for yearly payments of £791 + RPI to repay the £29k.

A reasonable investment strategy to cope with standard inflation, though its far from being guaranteed. Dividend increase would lag inflation as it would take some time for inflationary increases in profits to work their way through to the dividend.

There have been periods in the past (1970s and 1980s) with major inflation increases and times much more recently when dividends have slumped. Your strategy wouldnt give much protection there when it could really be needed.

But yes the point is that guarantees are expensive. If you are prepared to take some risk then you can get a much better base income.

philng

So how do I do that? What are the alternatives? I am ok with the risk as I have a final salary pension from my employer & other investments of £400K.

Linton

philng wrote: »

So how do I do that? What are the alternatives? I am ok with the risk as I have a final salary pension from my employer & other investments of £400K.

Drawdown from a SIPP portfolio of income funds and high dividend paying shares.

If your FS pension + State Pension > £20K you can get unrestricted, though taxed, income from your SIPP.

Or of course set up an S&S ISA. that's what I have done.

philng

but how do i get the money out of my wifes employer scheme? their illustration only shows the annuity option? what do I need to do next? Thought you couldnt draw out & put in to an ISA?

Linton

philng wrote: »

but how do i get the money out of my wifes employer scheme? their illustration only shows the annuity option? what do I need to do next? Thought you couldnt draw out & put in to an ISA?

Sorry, I wasnt linking back to your original post, just talking about the principles. To get at the money in drawdown you would simply transfer the pot to a provider who offers drawdown. This could be a SIPP where you manage your own investments though other managed options are available.

Since your wife's pension pot is relatively small drawdown may not be worthwhile. Also, if your wife doesnt have £20K in guaranteed annuities and state pension the amount she can take each year would be limited to a bit less than what she could get from a non-inflation linked annuity, which actually would tie in OK with your 4% example.

When you take the money from your pension as drawdown it will be taxed just like any other income. This and the limit in amount you can withdraw means that this is nothing to do with the rules about cashing-in a pension.

This is the limit of my knowledge as I have yet to set up my own drawdown pension. Hopefully someone will be along who can give you more details and say whether its worth the effort.

philng

I now have a response from my wifes pension scheme:

They say she cant draw 25% as tax free as 'in some circumstances it maybe necessary to restrict the amount of Tax Free Cash you may take in order to ensure that the remaining pension equals the statutory minimum scheme benefit at state retirement pension'.

The max Tax Free Lump sum they are advising is just £1711 based on the overall pot of £29161.

What does this actually mean? This is a defined contribution company scheme.

Also they say the scheme does not offer an Income Drawdown option. Does this mean I can transfer the pot on retirement to a provider who is able to offer such a facility?