GAR pension illustration

Linton

I am about to take my GAR pension. The pension company have sent a number of illustrations which seem to be based on the same rates, so it looks like I do have a real choice. Obviously not taking the lump sum is a no-brainer.

There is the base option - no lump sum, no increase: £15K
They then give a 3% increasing option of £12K.

Looking at the annuity comparison sites a 20% reduction in annuity for 3% increasing seems very generous, 30% being the reduction I saw. Is it generous? Could it be an effect of the conditions of the GAR?

I was intending to take the vanilla option but the 3% one does seem very tempting on the basis of Discounted Cash Flow calculations. Have I have missed something??

sandsy

I think it's a function of the higher annuity interest rate used to calculate the annuity payment.

UpAndDown_2

Linton wrote: »

I am about to take my GAR pension.

I'm in the same position in that I intend to take my GAR pension in April when I am 60. In my case taking a 3% increasing annuity will reduce the annual payment by 26.24% so less generous than yours.

I'm not convinced that not taking a lump sum is a no-brainer but it depends on the actual annuity rate compared to what could be achieved by investing the lump sum. My pension has two pots, protected rights (i.e. SERPS/S2P) and non-protected rights, with different GARs, the GARs on the protected rights being about 13% lower. For an annuity guaranteed for 5 years with no spouse provision the overall GAR works out at 7.577% for level and 5.589% for 3% increasing.

kidmugsy

In your DCF calculations have you allowed for basic rate income tax increasing from 20% to 30% over, say, fifteen years? Money that's meant to accrue later is always a hostage to fortune.

Linton

UpAndDown wrote: »

I'm in the same position in that I intend to take my GAR pension in April when I am 60. In my case taking a 3% increasing annuity will reduce the annual payment by 26.24% so less generous than yours.

I'm not convinced that not taking a lump sum is a no-brainer but it depends on the actual annuity rate compared to what could be achieved by investing the lump sum. My pension has two pots, protected rights (i.e. SERPS/S2P) and non-protected rights, with different GARs, the GARs on the protected rights being about 13% lower. For an annuity guaranteed for 5 years with no spouse provision the overall GAR works out at 7.577% for level and 5.589% for 3% increasing.

Mine is rather better having been started in the early 1980s when interest rates were much higher and life expectancy rather lower. It had a guaranteed investment return of IIRC 8%. I think the annuity was guaranteed on a similar assumption - this being compatible with a simple fixed annuity of 11%.

Linton

kidmugsy wrote: »

In your DCF calculations have you allowed for basic rate income tax increasing from 20% to 30% over, say, fifteen years? Money that's meant to accrue later is always a hostage to fortune.

A point to ponder. A simple way of modelling that is to decrease the annual discount figure. I need to bring it down to 0.92 (ie 8% interest rates) before the breakeven point exceeds life expectancy.

Millib

is the rate of the GAR the same for protected and non protected rights My understnading is protected rights will cease to exist. Any which exist on 5 April 2012 become non-protected rights, so will no longer be subject to special rules.Therefor The GAR % should be the same on the whole fund.

kidmugsy

Linton wrote: »

There is the base option - no lump sum, no increase: £15K
They then give a 3% increasing option of £12K.

If you have no other income I suppose the bigger one is more disadvantaged by income tax (until, say, your SRP begins). Also if you have no other taxable income but interest on savings, the second offers you an advantage with the new up to £5k 0% band.

Another way to view it is to take the bigger pension but live off the smaller, investing the difference into (say) a pension. Presumably your pension investments would have to do implausibly well for this idea to be advantageous? But it would at least give you some capital instantly available in times of need, being therefore some compensation for forgoing the lump sum.

Put yet another way: would taking the lump sum plus the escalating annuity be unambiguously better than forgoing the lump sum and taking the level annuity? If so, you can bin the idea of the level annuity and just weigh up lump sum + escalator vs bigger escalator alone.

Really, what's best depends on your other financial circumstances, doesn't it? If you already have heaps of available dosh, the lump sum is less attractive than if you don't. If you are already on the verge of drawing SRP, deferring SRP while drawing the £15k, or even taking the lump sum, might look best.

sandsy

Millib wrote: »

is the rate of the GAR the same for protected and non protected rights My understnading is protected rights will cease to exist. Any which exist on 5 April 2012 become non-protected rights, so will no longer be subject to special rules.Therefor The GAR % should be the same on the whole fund.

If the protected rights fund wasn't eligible for a GAR in its own right in the first place, then the former protected rights are unlikely to be eligible for a GAR.


The removal of protected rights affected the way the annuity had to be taken (with spouse's benefits, pensions increases etc), not the annuity interest rate on which it had to be offered.

atush

Are you of normal good health? With a long lived family and have no harmful habits?

If so, I'd be inclined to take the 12K 3% increasing pension.

And consider opening a PP and whacking in some money to get the TR boost and 25% TF?

sandsy

I suspect Linton took his pension some time ago given that this thread has been bumped by another poster today!