Annuity fees higher and Insistent Client status if 'No Cash' option taken?

jem16

tokai69 wrote: »

I have just looked at the written illustration and the figures are actually worse than I thought:
When you compare the monthly payments WITHOUT tax free cash, my preferred option, with the combined total of the monthly payments WITH tax free cash taken out and the monthy income from the Purchased Life Annuity, I am £1.56 a month worse off and it will cost me an extra £300 for the unwanted advice.!

Are you considering the tax implications?

It's not a simple case of adding up both monthly amounts as the tax is handled differently between normal annuity and purchased life annuity.

Perhaps if you can give some actual figures it would help as an extra £100pa can make a huge difference.

sandsy

tokai69 wrote: »

I have just looked at the written illustration and the figures are actually worse than I thought:
When you compare the monthly payments WITHOUT tax free cash, my preferred option, with the combined total of the monthly payments WITH tax free cash taken out and the monthy income from the Purchased Life Annuity, I am £1.56 a month worse off and it will cost me an extra £300 for the unwanted advice.

How can this be in my best interests?

Without tax free cash: ALL of annuity income is taxable income (after personal allowance taken into account)

With tax free cash: the PLA income is only partially taxable

LEAVING YOU BETTER OFF

tokai69

Thanks for the reply jem16.

Some PLA figures for you:
Yearly income £1,123.80
Monthly before tax £93.65
Tax on interest part @20% £4.95
Monthly income after tax £88.70

Income from another final salary pension and these annuities mean I will be a 20% basic rate tax payer.

jem16

tokai69 wrote: »

Thanks for the reply jem16.

Some PLA figures for you:
Yearly income £1,123.80
Monthly before tax £93.65
Tax on interest part @20% £4.95
Monthly income after tax £88.70

Income from another final salary pension and these annuities mean I will be a 20% basic rate tax payer.

So what are the figures for the normal annuity with and without tax free cash?

As a rough guide and assuming your final salary pension already takes you above the personal allowance so all of the annuity is taxable, that extra £93.65 would be wholly taxable at 20%.

So £93.65 at 20% tax would be £18.73 whereas you only have to pay £4.95 through the PLA. That would make you £13.78pm better off.

jamesd

Much of the income from the PLA is tax free, the income from a normal annuity is 100% subject to income tax. The values you've been given should tell you how much of the PLA income is tax free and how much is taxable. You need to compare the after tax position, not the before tax one.

One case where the PLA can be worse is if someone has an income that is going to be within their personal allowance even with all pensions and other income added. Then the slightly lower PLA income level has no associated tax advantage. But this is uncommon.

But rather than persisting with this company, get an IFA to help and have the IFA work out for you the before and after tax position each way. The IFA will probably be able to get you higher annuity rates anyway and if you have any medical condition that affects your life expectancy there may be a significant extra boost from that as well.

tokai69 wrote: »

Some PLA figures for you:
Yearly income £1,123.80
Monthly before tax £93.65
Tax on interest part @20% £4.95
Monthly income after tax £88.70

Those numbers mean that of the £93.65 monthly income, only £24.75 of it is taxable, the other £68.90 is tax free.

If we know the amount for the standard annuity and your other income (state pensions, any other pensions or investment income), we can then compare the after tax income from each way of doing it and tell you which is likely to leave you better off.

tokai69 wrote: »

Income from another final salary pension and these annuities mean I will be a 20% basic rate tax payer.

Because your after tax position will depend on how much of the normal annuity ends up being taxed we'll need to know rough numbers for your other income as well as for these annuities, else we won't be able to get the right after tax situation. We know that generically the state pensions tend to use up most of the personal allowance but it's better to have the real numbers rather than just using that approximation.

tokai69

Thank you all for your comments. I will make sure I seek out unbiased advice before proceeding.

jamesd

tokai69 wrote: »

When you compare the monthly payments WITHOUT tax free cash, my preferred option, with the combined total of the monthly payments WITH tax free cash taken out and the monthy income from the Purchased Life Annuity, I am £1.56 a month worse off and it will cost me an extra £300 for the unwanted advice.

How can this be in my best interests?

Even if I did get a bit more with the PLA how long would it take to recoup that £300? If you take the £7 a year extra that I mentioned in the original post as an example it would take me 42 years!

Looking at the numbers you provided later, if the whole annuity would be taxable, the PLA would save you £13.78 a month in income tax. So after deducting £1.56 that's £12.22 a month improvement for the rest of your life - normally with half of 65 year olds living to around 88 or older. It'd take about two years to recover the £300 cost, though that might be payable by taking it from the pension pot instead of directly from your pocket.

An IFA will probably both charge more and get you higher annuity rates.

dunstonh

Typically you would expect the fee for advice (or fee for distribtion as the non-advice option would be) to be included in the annuity rate rather than being paid for by cheque.

atush

The only time I can think of, when not taking a tax free lump sum is a good idea, is when you are in receipt of a final salary pension which is uplifted by inflation, and has an included spousal benefit.

dunstonh

atush wrote: »

The only time I can think of, when not taking a tax free lump sum is a good idea, is when you are in receipt of a final salary pension which is uplifted by inflation, and has an included spousal benefit.

GARs can be another. Enhanced terms with some. Or where the annuity provider uses tiered rates dependent on the value of the fund and can beat the net position of the purchased life provider.

Typically, you would expect the purchase life annuity provider to be different to the lifetime annuity provider. I wonder if the tied or multi-tie service the insurer has means they are using their own product or limited panel and resulting in poorer terms?