Confused over annuities

Valleygirl99

My question is that out of a pot of £80000 should i take my 25% (which i don't actually need to spend at the moment) so that I can reinvest it somewhere-where?) or keep the whole sum intact in order to get a better return? I am inclined to look at an invested annuity for the sum as level rates seem so low and I hope to have many years ahead of me to spend it.

dunstonh

You are asking a question that requires your personal circumstances to be known as well as the terms of the pension. For example, generically, a personal pension without guaranteed annuity rates should always see the lump sum taken. However, one with Guaranteed annuity rates could vary that decision. If there is GMP involved it could influence the decision as could transitional reliefs such as pension commencement lump sum protection.

If you dont need the pension then maybe its better not to commence it. Death benefits are typically reduced on commencement. And you only get one bite of the tax free lump sum. Investment backed annuities or short term annuities could be an option but they come with potential negatives as well.

Valleygirl99

Thanks for that information. I already have an adequate though small teachers pension. I am thinking of taking my AVC as an income to supplement this from the new year. Surely for each year that I leave the pot untouched I'm losing income which will be hard to make up. Im now vering towards a 5 year plan with the option to change if my circumstances alter.

kidmugsy

Valleygirl99 wrote: »

I already have an adequate though small teachers pension. I am thinking of taking my AVC as an income to supplement this from the new year.

Are you trying to bridge a gap before State Retirement Pension, or do you have that too?

Do you favour an investment-linked annuity over income withdrawal to avoid the demands of managing the investments yourself?

My own feeling is that if you can remove the 25% (which needn't be done in one lump) and put the money into S&S ISAs, you are setting yourself up for tax-free income sometime in the future. Maybe there's even a case for filling ISAs while they are still available. Why not wait for the Autumn Statement on December 4th, to see whether there are any changes for ISAs in the wind?

FatherAbraham

Valleygirl99 wrote: »

My question is that out of a pot of £80000 should i take my 25% (which i don't actually need to spend at the moment) so that I can reinvest it somewhere-where?) or keep the whole sum intact in order to get a better return? I am inclined to look at an invested annuity for the sum as level rates seem so low and I hope to have many years ahead of me to spend it.

There are a couple of issues mixed together here.

Barring the special circumstances which dunstonh mentions, even if one just wants income for life, one should take the maximum tax free lump sum from a defined-contribution scheme. That tax-free sum can be used to buy a purchased life annuity to provide income for life.

A purchased life annuity has different taxation from a pension annuity -- part of the distribution provided by a purchased life annuity is regarded as return of capital, and therefore exempt from income tax.

Individual circumstance complicate this decision, however, because purchased life annuities have lower rates than pensions annuities, because the people who buy them are healthier (annuities are a good bet for the long-lived).

You say that annuity rates seem low. They're not. They just represent the market value of getting someone else to take on the risk that you outlive your investments.

More counter-intuitively, returns from annuities tend to fall with starting age. The "rate" increases, but the payout period shortens, and one loses out because of mortality drag (http://en.wikipedia.org/wiki/Mortality_drag). Of course, I'm presuming that leaving a legacy is of no interest to you, since you don't mention it.

Delaying annuity purchases is yet another way in which irrational investors destroy their own wealth.

Warmest regards,
FA

Freecall

kidmugsy wrote: »

Why not wait for the Autumn Statement on December 4th,

George Osborne won't be in the country on the 4th.

The Autumn Statement will be delivered to Parliament on the 5th.

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