Purchased Life Annuities to cover 10 yrs till mid 60's

Jack_Griffin

I am looking for some information about these, in particular I'd like to get a ball park idea of the sorts of rates they might pay in my circumstances.

I'm 57 and currently not working, I have a decent private pension fund, but I don't want to buy an annuity with it soon as the rates are poor and I'm too far from considering myself completely retired (never say never), though I think it is an option.

I have a lot of liquid assets some of which will become available to be redeployed in the summer and I can use some of it to support myself till state pension age, when I can buy an annuity & take the deferred benefit pension I've got.

I believe its feasible for me to buy a 10 year purchased life annuitiy (PLA) from savings which will pay for my basic needs till I get to that point.

I believe a PLA won't be subject to income tax or national insurance except on a small element equivalent to the 20% tax I'd pay on savings interest.

A few questions.
1) Should my income be only savings interest plus taxable element of the PLA would all interest under the personal allowance be tax free and reclaimable?
2) What sort of rate would a 10 yr PLA be for someone of my age in good health? I'm thinking of committing from £150,000-£175,000.
3) It would be important to me that the payout would be as good as or better than I'd get from drawing the money from savings, I presume I should get a better interest rate than I would doing that at the risk of rates going up a lot in the next 10 years and losing out as I'd be tied into the awful prevailing rates.
4) Alternatively could I get 2x5 year PLA's to hedge against rates rising in the next 5 years?

The attractions are..
1) I'd get a monthly cheque and I could manage it in the way I would a regular salary.
2) If I got a job of any sort in the next 10 years it wouldn't really effect the PLA, I could always use the extra cash from that to plough back into an pension fund to get the 20% tax free element.

I'm not seeing too many pitfalls, unless there are some important issues I don't comprehend.

I think I'll need to do this through an IFA, but I don't want to speak to one about it without being fairly sure that the strategy is sound, of course if anyone can propose a better strategy I'm listening.

kidmugsy

Jack_Griffin wrote: »

I have a decent private pension fund...the deferred benefit pension I've got.

Are these separate things?

Jack_Griffin

kidmugsy wrote: »

Are these separate things?

Yes they are. But what they are is irrelevent to the question really.

kidmugsy

Jack_Griffin wrote: »

Yes they are. But what they are is irrelevent to the question really.

Then why did you mention them?

jamesd

My primary reservation here is that you have a private pension fund and aren't just using income drawdown from it to provide income. You don't have to buy an annuity with it, drawdown is fine.

A term annuity is likely to return about the same amount over ten years as you pay to buy it. Not a lot of interest or growth to offer at the moment. It's suitable for those who want almost no investment risk, for others the returns make it a fairly poor option.

Losing the capital outside the pension is not a good thing, generally, better to take income from the pension pot and maximise the amount not subject to pension restrictions.

If nothing else you should try to take enough taxable income from a pension with drawdown to use your full personal allowance.

Jack_Griffin wrote: »

The attractions are..
1) I'd get a monthly cheque and I could manage it in the way I would a regular salary.
2) If I got a job of any sort in the next 10 years it wouldn't really effect the PLA, I could always use the extra cash from that to plough back into an pension fund to get the 20% tax free element.

The same attractions are available from a combination of pension drawdown and money in a savings account. Put a couple of years worth of planned income into a savings account, set up a standing order from the savings account and have the drawdown income paid into the savings account. Treat the standing order as your regular income, with the initial money in the savings account providing a stability buffer.

If the combination of interest and PLA taxable income was below the personal allowance amount, yes, you could file for receiving tax free interest from savings accounts.

It is unlikely that you'd get a PLA rate substantially better than investments, savings, maybe, maybe not. It's not a very competitive market compared to investments.

You could get a couple of 5 year annuities. Those are even less likely to beat investments or savings.

Pension drawdown and savings is likely to be the best approach here unless you are extremely risk averse or have so much money available that efficiency doesn't matter.

FatherAbraham

Jack_Griffin wrote: »

I'm 57 and currently not working, I have a decent private pension fund, but I don't want to buy an annuity with it soon as the rates are poor and I'm too far from considering myself completely retired (never say never), though I think it is an option

How can you know that annuity rates are "poor"?

The past is irrelevant; all that matters is whether annuity rates now are better or worse than what you can get in the future. How can you know?

I tend to think of annuity rates as "fair", based on market conditions. No "poor" or generous". They just are.

Warmest regards,
FA

Jack_Griffin

@jamesd - I read an article suggesting that a PLA offered a relatively high interest rate compared to other savings. From what you say this isn't really true & therefore it wouldn't be a suitable vehicle to use.

http://www.thisismoney.co.uk/money/saving/article-1695853/A-legal-way-for-savers-to-pick-up-14-interest.html

I'm not really comfortable drawing from my main pension fund at this stage as it isn't really any bigger than needed in combination with the state pension to guarantee an acceptable lifestyle. I wanted to let it grow and put some money in from time to time in to keep it growing so it can do the job when I get to 66.

I guess my issues problems will only be solved by getting a job for a few more years.

jamesd

If you buy a life annuity it would pay more than a savings account, but you seem to be looking for a term annuity, not a life one. No harm to check the rates, just don't be surprised if it's not as good as you think.

When it comes to pension or non-pension money, it still grows, just insde or outside the pension. Where it is doesn't change the growth rate, just how much flexibility you get later.

Jack_Griffin

Thanks, I'm working on that one...