GAR v SIPP & drawdown

roumeli27

Advice please from those all knowing.

I am 65 at the year end and have to date taken a phased retirement route from age 57. I am now fully retired.
I have two outstanding pensions due for payment on the date of my 65th. Both have Gar's. One is a section 32 with Aviva which should be approx. £8.2k pa and the second is with S.Widows which should be approx. £13k pa. The fund value for both is in the region of £200k depending on final bonus.
Is there any way I can take these high value annuities in a tax efficient way as I do not need to take all the income now. Can I and should I consider SIPP & drawdown?
I have a full state pension due which I may defer for 5 years.
I will be taxed at the basic rate.

Thanks

dunstonh

The section 32 buy out bond may also have GMP as well as a GAR. That would be worth checking out.

Is there any way I can take these high value annuities in a tax efficient way as I do not need to take all the income now.

Potentially yes. However, whether you should would depend on the terms.

Can I and should I consider SIPP & drawdown?

Cant see any reason why you would take drawdown if you dont need the funds.

The devil is in the detail and would likely need some detailed calculations and analysis to see which option is best. However, generically, all of what you asked is possible.

kidmugsy

roumeli27 wrote: »

Both have Gar's. One is a section 32 with Aviva which should be approx. £8.2k pa and the second is with S.Widows which should be approx. £13k pa. The fund value for both is in the region of £200k depending on final bonus.

Are those pensions calculated after you've taken a 25% lump sum?

If so, the second must correspond to an annuity rate of about 8.7%, which on the face of it is so attractive that you might want to take it, tax efficient or not. I assume that it's a level annuity and that you expect to live a long time? Do its terms - e.g. re spouse's annuity - suit you? Would SW let you forgo the lump sum and turn the whole pension pot into an annuity at that rate?

Perhaps therefore it's the Aviva one you might consider doing something else with. But I don't see what sort of tax efficiency you can aim at if you are a 20% income tax payer, except taking the biggest possible tax-free lump sum. What's possible there in terms of an S32 I plain don't know.

roumeli27

Thanks for replies.

The section 32 does have a GMP and the gross yield on total premiums is 8.93% per annum. There is also 50% spouse cover.
I do not think there will be a lump sum option as there will probably be a shortfall for Aviva to fill to meet the GMP.

The SW is £111.11 per £1000 of fund so taking all of it as an annuity would be the best option.

My real issue is I will have to take both annuities as they are so valuable when compared to current rates but should I die early then I have lost the bulk of the fund value.
I know 'I want my cake and eat it' but is there any way I can keep the fund in drawdown?

dunstonh

The section 32 does have a GMP and the gross yield on total premiums is 8.93% per annum. There is also 50% spouse cover.

And dont forget indexation.

I do not think there will be a lump sum option as there will probably be a shortfall for Aviva to fill to meet the GMP.

So, you need to look at what you will be giving up for the smaller transfer value.

My real issue is I will have to take both annuities as they are so valuable when compared to current rates but should I die early then I have lost the bulk of the fund value.

Knowing your date of death does make planning easier

You need to look at breakeven points using realistic figures and perhaps consider reinvesting some income if you dont need it.

but is there any way I can keep the fund in drawdown?

yes

roumeli27

Thanks.

Aviva indexation is 3% pa for some of the value.
SW is a level term single life no escalation.

I have determined my death to be year 2050 but the insurance premiums are more than the pension:j.
Is the procedure to ask the provider to quote a sum to transfer to drawdown taking into account the annuity rate they would save paying?

I estimate the breakeven point to be 15yrs approx. if I take the annuities on the due date.

Assuming transfer I would take a small pension leaving the rest invested in a family SIPP.

kidmugsy

Those pensions look so generous, wouldn't the sensible thing be to draw them and (i) put some of the income into a pension for your spouse, and (i) take out life insurance so that your spouse is well provided for if you pop your clogs early?

If her age suits, could your spouse also earn herself a higher State Pension by deferring?

jamesd

What are the GAR percentages? That'll help to know how good or bad the deals are.

If you don't need the money and the GAR rates are good, you have the option of taking the income and then using it to make more pension contributions up to £3600 a year gross. That'll gradually accumulate a pot from which you can later take 25% as a tax free lump sum, so gaining some tax advantage. The rest could be invested within a stocks and shares ISA and perhaps outside it also if funds are sufficient.

Given your potential guaranteed income level you'd be able to use Flexible Drawdown instead of Capped Drawdown, once you were certain that the effect ban on making more pension contributions after entering Flexible Drawdown no longer bothers you. With Flexible Drawdown the 25% lump sum is free and you can take as much of the rest as you like whenever you like, added to your taxable income for the year in which you take each chunk.

If there's a shortfall on the GMP that's another potential significant boost to the effective annuity rate.

Deferring the state pensions seems like good long term planning for someone who doesn't need the income.

roumeli27

Thank you all for your constructive replies.

The GAR's are 9% and 11.1% which I know is unachievable with current rates.
If I have understood correctly then my best option would be to take the annuities on offer. This would take my personal pensions in excess of £20K pa.
I could then re-invest in a new deferred pension to take some of the income into a phased retirement pot to age 75 and make additional contributions until maturity. Taking a lump sum at that time would also be an option.
My thought was to defer my full state pension for 5yrs to gain additional index linked pension as my S.Widows pension is without escalation. This could then offset inflation.
I will follow your good advice and look into the drawdown options.
My wife currently has a full state pension because we made additional NI payments to cover her gap years.
She will defer for two years when I receive an increased pension. I will make up her loss by passing some of my receipts to her.
As they say "a man with a plan".

Thanks

kidmugsy

roumeli27 wrote: »

The section 32 does have a GMP and the gross yield on total premiums is 8.93% per annum.

The SW is £111.11 per £1000 of fund so taking all of it as an annuity would be the best option.

These numbers are inconsistent with the ones you originally gave.

roumeli27

Re; Annuity numbers inconsistent?

Perhaps you mean because I rounded up from 8.93 to 9.0%?
This applies to the gross re-valued GMP for the Section 32.
The S.Widow is £111.11 per £1000 of fund value.
I do not yet know the final figures as the final bonus for both funds will not be known until I take the pension.

If I have something in-correct in my assumptions please explain.

Thanks