Immediate Vesting Pensions...

sbthang

Hi Moneysavers,

I've been looking at ways to improve the retirement income of my wife (a life-long self-employed lady that has NO pension provision) and arrived at Immediate Vesting Pensions (IVP) as a possibility.

I think that the Annuity element is less predictable in light of the Chancellors declared changes to Pensions, however it would be good to have some feedback on what I have thought might be a plan...

My wife has just turned 55 so, as I understand it, in each Tax Year a new IVP can be 'purchased' - with the first one available now.

I've looked at some 'quick pension calculators' and can see that if I invested the same annual figure into a new Stakeholder Pension each year (as would be paid into the IVP's over the same period) then after 10 years the overall annual income is likely to be approximately the same when comparing the two propositions.

So, if I planned to buy one IVP each year over the next 10 years, in each year she will receive the income of each and every previous years IVP - by the 10th year, she will have received 45 'annual' income payments'. In my reckoning, this tips the balance in favour of the IVP route, or am I missing something fundamental?

Your thoughts would be greatly appreciated.

Regards, Steve

kidmugsy

I can't help you with your immediate question, but let me just say that when I considered such a policy it occurred to me that it might be convenient to open each policy in a different month so that the overall effect would be like receiving a monthly annuity pay-out.

Secondly, has she been paying the self-employed National Insurance Contribution, and has she had a recent forecast of her State Retirement Pension?

Thirdly, does she earn enough that the IVPP would be subject to income tax? If so, it might be wiser to contribute now, and draw the money out later when she's given up work and the payout might be free of income tax, in whole or in part.

atush

You need to look carefully at the costs of doing this, as charges can wipe put quite a bit of that tax boost. so basically what you missed is one lot of charges over 10 lots of charges. You also bypassed the whole annuity route, in that annuities for 55 year olds are very low. So going DD and leaving the pots invested (at least the 75%) might make an annuity bought at 65 more attractive.

What might make much more sense, is to contribute this year and ongoing into a PP for her. Racking up each years contribs plus investment gains. Then taking the pension in 10 years time? The charges will eat up much less of your pot this way.

Basically what you propose was allowed before. What has changed is she can take each pot in whole each year. If her income is under 10K, then she can take mroe of each pot tax free.

Is she SE as a sole trader or a LC? This could make a huge difference.

And yes, you should make sure of her SP provision and get a record of her contributions and any S2P she may have earned int he past.

dunstonh

I think that the Annuity element is less predictable in light of the Chancellors declared changes to Pensions, however it would be good to have some feedback on what I have thought might be a plan...

Nothing has changed regarding annuities. They are continuing as normal. They will just be purchased by less people. They will continue to remain suitable and best for the majority.

My wife has just turned 55 so, as I understand it, in each Tax Year a new IVP can be 'purchased' - with the first one available now.

Why does she want an IVPPP and not just a normal personal pension which is only commenced when needed?

atush

What I said lol

sbthang

Thanks for input fellow MSE's...

Trust me, my following comments are not intended to be 'argumentative'; I'm not trying to cherry-pick facts to justify the multiple IVP route - I genuinely want to get a good result for my wife.

Kidmugsy:

• Like your idea re: staggering - as you say, the result would indeed end up 'feeling' like a monthly income.
• Yes - Self Employed NI Contributions. Received confirmation from DWP that she has made sufficient contributions to receive Full State Pension.
• Yes - she does earn enough to pay income tax on her Self Employed income.

Atush:

• I'm confused by your point regarding 'charges'... the scenario I am looking at is buying an IVP through Cavendish. They actually rebate back the commission they receive from Standard Life (£100 per IVP) so the only cost is their £35 one-off fee each time an IVP is purchased (no on-going 'annual' fee). I believe that a £35 one-off fee is lower than a Personal/Stakeholder Pension provider would be...? (10 years 'fees' on the IVP route would be £350 total - what would an equivalent overall cost be on a Personal/Stakeholder Pension?)
• I've looked at projections of Personal/Stakeholder Pensions and the overall annual income received after 10 years of contributions doesn't differ that much (less than 5%) between the two routes... Unless I've incorrectly calculated that using multiple IVP's will actually give my wife 45 additional 'annual' payments over the next 10 years BEFORE a Personal/Stakeholder Pension would actually kick-in (with approximately the same annual income as the aggregated total of the 10 individual IVPs...)
• Are you saying that the new Pension rules announced recently would also apply to IVP's as well? I'm just not sure how that would/could influence what I'm trying to do here...?
• My wife is a Sole Trader - what influence will this have on what I'm proposing?
• State Pension confirmed as fully qualified.

Dunstonh:

• Well, that's not strictly what I meant about Annuities. I appreciate that they are continuing 'as normal'; my comment was actually referring to how the Annuity Industry will adapt to the fact that one will not 'have' to buy an annuity in the future - there could be a minor (or dramatic) change in the value and income of annuities...I imagine it's a moving target at present and subject to the Industry working out how they will market annuities?
• The 'why' is not that 'she' wants an IVP - it's that I am trying to assess a good way of providing an income for her when she reaches retirement; as you can see, I am considering alternatives and my conclusions show some merit to multiple IVP's. Yes, I could just take out a Personal/Stakeholder Pension for her, but I believe my figures suggest that with the 45 annual income payments that would ensue over the next 10 years, in addition to the rebate in commission from Cavendish totaling £1000 over the period, there is some merit to considering this route.

If I'm totally barking up the wrong tree, then I'll start a Personal/Stakeholder Pension for her...but I've yet to see any compelling reason that supports this view.

To recap my interpretation of the 'mechanics' of the multiple IVP route:

The product is designed to provide an annual annuity income PLUS a 25% tax-free lump.

So, by investing £2,880 into an IVP, the government adds £720 in Tax Relief (bringing the 'pot' up to £3,600 to buy the annuity), but straight away you receive a £900 tax-free lump sum PLUS £100 commission rebate PLUS the first years annuity payment of circa £90.

Costs have been £1,880 PLUS the £35 fee = £1,915 to buy a circa £90 annual income for the rest of my wife's life. (plus she receives the first years annuity payment upon purchase of the IVP annuity)

I have received annuity projections for her being 55 and 65 years old (to 'cover' the age range of her purchasing IVP's) and, as of today, the annuities range from circa £90 to circa £120.

Pension projections, as of today, don't give sufficiently higher projections on annual income if I invested the £1,915 each year into a Personal/Stakeholder Pension.

So, I arrive back to the point that over 10 years, my wife would receive a total of 45 annuity payments which could total £4,500 BEFORE a Personal/Stakeholder Pension would even commence...

As I stated at the top of this post, if I've missed something in my conclusions then I will review my current opinion accordingly, but I don't think I have missed anything...

Regards, Steve

gterr

sbthang wrote: »

Costs have been £1,880 PLUS the £35 fee = £1,915 to buy a circa £90 annual income for the rest of my wife's life. (plus she receives the first years annuity payment upon purchase of the IVP annuity)

That's sounding like a 4.6% return on the first IVP, which is attractive, or am I missing something? OK, if you are comparing that to the rate of income you might take from a SIPP or a S&S Isa you have to factor in the effects of inflation, and the fact that none would be heritable on death, but even so........

kidmugsy

I suggest you weigh up (i) your IVPP scheme, with tax paid on the income, versus (ii) a personal pension alternative, with income withdrawn tax free when your wife no longer has any earnings.

I'd have guessed that the tax point might be compelling.

dunstonh

Well, that's not strictly what I meant about Annuities. I appreciate that they are continuing 'as normal'; my comment was actually referring to how the Annuity Industry will adapt to the fact that one will not 'have' to buy an annuity in the future - there could be a minor (or dramatic) change in the value and income of annuities...I imagine it's a moving target at present and subject to the Industry working out how they will market annuities?

There hasnt been a requirement to buy an annuity for many years now. The budget announcement was incorrect in saying you no longer have to buy an annuity. What is most likely to happen is that small funds (say under 30-40k) will cease to buy annuities. This will reduce the effects of cross subsidy. However, it will also reduce costs. High volumes of tiny value annuities dont really aid the cross subsidy pool but cost more to run. Increasingly, annuities have been based on health, past occupation and location and mortality gain cross subsidy is reduced in those cases. That reduction in mortality gain has been significant since the 80s. It had bottomed out around 2003 and annuity rates then began to rise again before the credit crunch hit.

The 'why' is not that 'she' wants an IVP - it's that I am trying to assess a good way of providing an income for her when she reaches retirement; as you can see, I am considering alternatives and my conclusions show some merit to multiple IVP's. Yes, I could just take out a Personal/Stakeholder Pension for her, but I believe my figures suggest that with the 45 annual income payments that would ensue over the next 10 years, in addition to the rebate in commission from Cavendish totaling £1000 over the period, there is some merit to considering this route.

Why rebate commission. Why not do it on nil commission basis instead? That would almost certainly be the better option.

the annuity rate she gets this year, next year etc will be based on her health, age etc at that time. Using a personal pension and deferring the decision to commence until needed will result in a higher annuity rate and higher fund value. So, whilst it wouldnt have extra years of paying a low income, the annuity rate would be better on a higher value. Plus, a larger pot may be better taken under drawdown (or whatever name we end up using for 2015 style withdrawals). Tax needs to be considered as well. More tax will be paid pre retirement than post retirement.

sbthang

Thanks again MSE'ers...

Gterr:

• Yes - I agree, the rate of return does appear favourable in the current climate...
• "Not Inheritable on Death" - fair point...although I have more than adequate Life Cover in place...

Kidmugsy:

• Fair point - income will diminish the 'gains' in the first 10 years, but I'm thinking that even at a 20% Income Tax rate (which applies to my wife) the 45 annuity payments could still aggregate in the region of £3,600...
• Correct me if I'm wrong, but the "income withdrawn tax free when my wife has no other earnings" would apply to both IVP route and Personal/Stakeholder Pension...?

Dunstonh:

• That's my bad then...as you know the popular press portrayed a very different 'playing field' for Pensions and Annuities after the Chancellors Budget recently. I stand corrected for my assertion that the annuity industry is heading toward a shake-up of it's business...
• You note "Why rebate commission" - this is for the simple fact that I am unaware of any alternative route to purchase an IVP on a nil commission basis...if I invested direct with Standard Life I'd get NOTHING back from them, would I?

To quote Cavendish Online (a 'recommended broker' on MSE website):

"Unlike any other broker in the UK, Cavendish Online will rebate commission of £100.00 back to the investor, having taken our fee of £30.50 from the commission. This is the best deal on this plan in the UK."

Note: This actually highlights an error in my original calculations; I had misread both Cavendish's fee (I noted £35.00 but it is in fact £30.50) and completely missed that point that Cavendish TAKE THEIR FEE from the rebated commission - in other words, it's not an extra fee to be paid by me; it's just not passed back to me. So, the previously noted 10 years fees of £350.00 is in fact incorrect - based on today's figures, the fee total is £305.00 and is not paid by me...it's withheld by Cavendish.

• It's accepted that in 10 years time the fund value of a Personal/Stakeholder Pension 'may' be higher (I'm acutely aware that nothing's guaranteed on any element of Finance) which 'could' arrive at a higher income, however the only data I (or anyone else to that mind) can work with to arrive at a fair decision is what is presented to me today and the current projections for a Personal/Stakeholder Pension are NOT significantly higher than a series of IVP's.
• Income Tax liability is indeed a fair point but am I incorrect in thinking that for the next 10 years to be taxed on 'something' is a definite bonus as opposed to not having 'something' for 10 years...?

(my Accountant stands by the adage "only you can decide if it's better to have to pay £20 tax in order to have an extra £80 in your pocket, rather than having no extra tax to pay and nothing extra in your pocket...")

At this time, I have arrived at the conclusion that although Personal/Stakeholder Pensions 'may' have the advantage after 10 years of contributions, the advantage just isn't 'that' significant as of today... 10 years of ever increasing actual income beats 10 years of 'hopeful' growth.

Thanks again one and all - you're a great sounding board for me.

Regards, Steve