Whether to take Pension at 60

Wings

Where one is reaching 60 (he doesn’t look it), and with his partner both have investment income of £30k plus a year, no mortgage, no debts etc. etc., and have been contributing towards a Pension scheme for the past 20 years.

Should that Pension be taken via an Annuity or a SIPPs Pension, the former through a 25% drawdown, with either a conventional guarantee or investment risk annuity?

EdInvestor

Perhaps you can clarify who owns what assets and gets which income and whether the income is tax sheltered (eg in Peps and ISAs).
Tax will have a lot to do with decision and it's done on an individual basis.

dunstonh

I wouldnt bother taking the pension at all. If you dont need the income then there is little point taking it out of a tax free environment and bringing it into a taxable one. In the pension it is out of the estate for IHT and it gets tax free growth. Just make sure the investment spread is suitable and leave it in the pension.

Wings

EdInvestor wrote: »

Perhaps you can clarify who owns what assets and gets which income and whether the income is tax sheltered (eg in Peps and ISAs).
Tax will have a lot to do with decision and it's done on an individual basis.

Thanks for your reply.

Both myself and my wife both earn and own assets 50/50. The investment income is received from rental income, again the capital invested into the properties are both free of a mortgage/loan and the income/rental received shared between us 50/50.

We have no need for the pension/annuity monies, although one of our funds, are with Equitable Life, me being 60 and my partner being 55, her's might bring a financial penalty.

Whilst we are both in good health, my initial thoughts are that even taking 25% drawdown, and being offered 6.8% annuity, we might be better to leave the pensions (accept possibly Equitable) to escape IHT, and for our 3 children.

EdInvestor

If you leave the money in the pensions, it will continue to grow and if you die before age 75, the total fund can go to your heirs tax free outside your estate.

It's also now possible to take benefits from a pension so as to draw the 25% tax free cash and put the rest into "income drawdown" , leaving it invested, but without drawing an income. If you did this and then died before age 75, the fund could go to your heirs minus a 35% tax charge.

It might be worth considering the second route for the Equitable pension sheltering the 25% tax free cash in your ISA allowances.Investing it properly would soon make up the current small 5% exit penalty.

Wings

Thanks for the reply Edinvester.

Both my wife and myself hold several Equitable Life Pension policies, my wife being just 55 years of age, in good health and with a prong long life family history, both her mother and grandmother reaching their 80’s. Myself, I am 60, a non smoker, where both my father and grandfather have died in their 60’s.

We, although we do not hold the bright light of hindsight, presently have no need to draw against an Annuity. My present thing is that we should allow our pension funds to remain within a present free tax free zone, rather than obtaining an Annuity that will fall within a tax zone, and possibly at the 40% tax rate.

With us both having funds within Equitable Life, then for obvious reasons we need both to take action on those funds. Although as to the other funds we hold, I can see as far as the wife’s youth there is an advantage of taking out an Annuity, but for myself, even with a first life guarantee, I possibly feel that leaving those funds where they are, out of the tax zone and free of IHT might be the best solution.

The total pension funds held for each of us is £170k, and with a draw down of 25% of that sum, we have found Scottish Equitable offering an Annuity of 6.8%.

dunstonh

The total pension funds held for each of us is £170k, and with a draw down of 25% of that sum, we have found Scottish Equitable offering an Annuity of 6.8%

The drawdown maximum amount will be the same across the board as that is defined calculation. I wouldnt use Scot Eq. Far better alternatives exist in execution only and advice options.

However, the minute you do drawdown, you bring the pension into a potentially taxable position where the remaining value inside the pension would be subject to a 35% tax on death if "encashed" and not passed to spouse. If passed to spouse, on their death, 35% would then apply.

If you didnt mean drawdown but annuity purchase, then it is unusual to find Scot Eq offering best rates (as in very rare).

jamesd

"Income drawdown" is not the same as a "draw down of 25%". The 25% is properly called the "tax free lump sum". Once you have taken the tax free lump sum, if you choose to take it, you then have two options:

• Take an annuity. If you choose this you should consult an IFA to find the best rate using the "open market option" that makes it possible to obtain the best annuity rate offered by any annuity provider. It usually won't be the company where you have your pension money.
• Go into income drawdown, otherwise called an unsecured pension. The money remains invested and you can choose to take an income from it or not. There are limits on how much income you can take, based on the annuity rate available.

It's also possible to split the pension and do this for only part of the total pension fund value.

If you're happy investing then staying invested seems fine.

It's also possible to gradually take benefits from the pension and invest the tax free lump sum into a stocks and shares ISA. The ISA investing can then produce tax free income or a readily inheritable lump sum free of tax. The 75% portion can be allowed to remain invested with no income taken or sufficient income can be taken to barely stay basic rate and produce just enough money to fully use the annual ISA allowance.

"Taking benefits from" is when you take the lump sum or annuity or use income drawdown. You can do it with only part of the whole pension pot.

This gradual shifting to an ISA can avoid the need to pay the 35% tax charge on much of the money. While you will have to pay that on the part in the pension, many years of growth will have been in the ISA and that will reduce the total that is subject to the charge.

As dunstonh said, if you don't actually need the pension the other option is simply not to take benefits or to take benefits from only a portion. The problem then is what happens to the pension when you're 75 and have to take benefits. The gradual shift to ISA investments might prove more efficient. In effect you're betting on a short life by going with the option of not taking benefits. In the long life case, it would have been better to pay just basic rate tax and have the extra 15+ years of growth in the ISAs.

EdInvestor

It is not sensible to leave money hanging around in pensions at zombie funds like Equitable Life.

Regardless of whether you take benefits or not, you should transfer this money out now to a better provider with a decent choice of funds. The MVA at Equitable is only 5% now so it's time to move on.

dunstonh

Yep. Any investment needs to be kept under review and altered when required. A pension is no different as it is an investment. No point leaving it in a duff investment when its so simple to get it sorted.