Accessing a pension pot tax-free

Eco_Miser

Hello everybody, I've come to this board for some suggestions and guidance about taking my tine private pension.
Thanks in advance.

First a few details about myself: single, male, will be 65 in February 2015.
I finished paid work five years ago, and have been living off my savings and investments, mostly S&S ISAs and current accounts, which I calculate would, by themselves, last me to over 100, if their value simply keeps up with inflation.

My State Pension Forecast (at 2014 values) is £131.28 pw, but I intend deferring that until at least the 2016/7 tax year, for 12% extra pension. This alone is again more than I need for a comfortable life.

I have a private pension pot estimated to be worth £21,733 on my birthday; a with-profits policy with Phoenix Life (Royal and Sun Alliance when I took out the policy).

My question is what to do with that pot.

1. an annuity with Phoenix at a 'valuable' guaranteed rate.
2. an enhanced annuity, but a dodgy thyroid isn't one of the highlighted conditions.
3. an annuity elsewhere. The Money Advice Service suggests about £1200 pa.
4. trivial commutation, but I would pay nearly £2000 tax and need to cancel then reinstate the P85s.
5. move the pot to a suitable provider and drawdown the money over three years, keeping the taxable part within my unused personal allowance, so no tax. This would be capped drawdown in 2014/5, and flexible drawdown thereafter.
6. move the pot to a suitable provider and drawdown as needed.
7. something else?

In the cases where I take a lump sum or sums, that money would be added to my existing investments or used instead of drawing on the existing investment).

My instinct is to take the pot as quickly as I can without incurring tax, and invest it to provide a tax-exempt income in future.
What is involved in arranging this and is there a list somewhere of suitable providers?

Have I missed something?

kidmugsy

Eco_Miser wrote: »

single, male, will be 65 in February 2015.
I finished paid work five years ago, and have been living off my savings and investments, mostly S&S ISAs and current accounts, which I calculate would, by themselves, last me to over 100, if their value simply keeps up with inflation.

My State Pension Forecast (at 2014 values) is £131.28 pw, but I intend deferring that until at least the 2016/7 tax year, for 12% extra pension. This alone is again more than I need for a comfortable life.

I have a private pension pot estimated to be worth £21,733 on my birthday; a with-profits policy with Phoenix Life (Royal and Sun Alliance when I took out the policy).

My question is what to do with that pot.

1. an annuity with Phoenix at a 'valuable' guaranteed rate.
2. an enhanced annuity, but a dodgy thyroid isn't one of the highlighted conditions.
3. an annuity elsewhere. The Money Advice Service suggests about £1200 pa.
4. trivial commutation, but I would pay nearly £2000 tax and need to cancel then reinstate the P85s.
5. move the pot to a suitable provider and drawdown the money over three years, keeping the taxable part within my unused personal allowance, so no tax. This would be capped drawdown in 2014/5, and flexible drawdown thereafter.
6. move the pot to a suitable provider and drawdown as needed.
7. something else?

My instinct is to take the pot as quickly as I can without incurring tax, and invest it to provide a tax-exempt income in future.
What is involved in arranging this and is there a list somewhere of suitable providers?

Forget 3 except as a means to 2, because otherwise 3 can't (presumably) beat 1. (What is that guaranteed rate?)

I'd reject 4 because I wouldn't want to pay tax.


I'd say it comes down to a comparison of 5 with 1 and 2. If the guaranteed rate is high enough, it's tempting: a guaranteed income until your death is a pretty comforting thing. You probably won't get similar returns without taking on a lot of investment risk, which in turn means that the returns aren't guaranteed. Since the annuity would be vulnerable to inflation you'd put your other investments into things chosen to protect you from inflation.

One other point: in case 5 you'd take your Tax-Free Lump Sum. In case 1 you probably would too, but if the annuity rate is stratospheric it might be worth considering not taking the TFLS (if that's allowed).

Other considerations: (i) Would you be prepared to defer your state pension a bit longer, at the expense of running down your savings a bit? (ii) Are you aware of the £5k 0% tax band for savings interest in 15-16, which will presumably continue until Chancellor Balls sweeps it away?

Anyway, for certainty of capital choose 5; for certainty of income 1 (or 2).

dunstonh

option 8. The money is currently sitting in a tax free wrapper outside of your estate. if you dont need it then maybe not take it.

Not saying that is right but you have focused on taking the money out of the pension but not included leaving it in the pension wrapper. It needs to be considered as you have said that you would take it out of your pension to put into your investments. So, is it better to leave it in the pension?

jamesd

Eco_Miser wrote: »

an annuity with Phoenix at a 'valuable' guaranteed rate.

What is that guaranteed rate? These rates can be twice today's open market rates so you shouldn't decide until you know what the rate is.

Eco_Miser wrote: »

an enhanced annuity, but a dodgy thyroid isn't one of the highlighted conditions.

I don't know the life expectancy impact of that. There are a number of places that do offer quotes for enhanced annuities and you could ask one of them. My guess is that the enhanced rate would be less than a guaranteed rate.

Eco_Miser wrote: »

an annuity elsewhere. The Money Advice Service suggests about £1200 pa.

Maybe but the guaranteed rate is likely to be better. An annuity elsewhere would also include the option of an enhanced annuity from elsewhere. It's not usual for the place with the investments to offer the best standard or enhanced annuity rate.

Eco_Miser wrote: »

trivial commutation, but I would pay nearly £2000 tax and need to cancel then reinstate the P85s.
move the pot to a suitable provider and drawdown the money over three years, keeping the taxable part within my unused personal allowance, so no tax. This would be capped drawdown in 2014/5, and flexible drawdown thereafter.

Best to wait until the new rules come in from April 2015 and allow taking of any amount under flexi-access drawdown. Then you can arrange to draw slowly enough so that you pay no tax, facilitated by deferring claiming your state pension so that isn't part of your taxable income.

Dunstonh makes a good point about leaving the money invested inside this or another pension. I'm assuming that you have ISA allowance available so that there is no direct tax wrapped benefit initially, just considerations of inheritance and related taxes at death. The pension probably offers a better deal on that death case. If you have beneficiaries this may be the best route. If you don't then moving the money out of the pension and into an ISA seems likely to be better just on flexibility grounds. There's also an advantage of the ISA if you need to pay care fees, since you would already have taken the money out tax free, while if you had to do it in a hurry you may not have the same opportunity for tax planning.

As a person who will reach state pension age before the flat rate comes in you will have an opportunity to buy additional state pension. The announced rate is £890 to buy an extra £1 a week, inflation-linked, at age 65. That's 52/ 890 * 100 = 5.84% inflation-linked income increase. That's going to be higher than any open market annuity but maybe not higher than a guaranteed annuity rate. Beware, the guaranteed rate might be for a level annuity, not inflation-linked, and that could well start out higher.

The same £890 would cover 6.8 weeks of your state pension for deferring. Deferring for you is at 1% increase every 5 weeks, no pro-rating for parts. One five week deferral gets you a 1% increase on £131.28, so £1.31 a week more. This means that initially, deferring buys you more extra income than buying extra state pension in this way - £1.31 plus the extra 1.8 weeks worth instead of just £1.

The cost of each extra year of income decreases as you get older but for the time period you're considering it doesn't look likely to be less good than 10.4% pro-rated for deferring, assuming that 10.4% rate continues to be available. The age 70 rate is £779 for each extra Pound per week. That's 6.68% increase per £7789 spent. Still less than deferring gets you at the 10.4% rate for deferring.

My inclination personally is to check the guaranteed annuity rate, then decide between that and withdrawing the money tax-efficiently to move it to ISA investments or defer the state pension.

bmm78

Eco_Miser wrote: »

1. an annuity with Phoenix at a 'valuable' guaranteed rate.
2. an enhanced annuity, but a dodgy thyroid isn't one of the highlighted conditions.

The viability (or otherwise) of options 1 and 2 depends entirely on the figures.

The Guaranteed Annuity Rate could be a gamechanger, or it could be irrelevant.

Thyroid issues are not on the range of conditions covered by the enhanced annuity providers, but there may be enhancements based on postcode, family health history, body mass index and a range of other things. Simple rule of thumb is to disclose everything and assume nothing. If you do a google search for an online annuity broker they should be able to quickly get some whole of market annuity quotes for you. You will then have some accurate figures to go from rather than the inaccurate and incomplete ones from MAS.

On a fund that size, bearing in mind what you've said about your other savings and investments, and factoring in State Pension deferral, I'd be inclined to lean away from an annuity unless it's a very high guaranteed rate.

Eco_Miser

kidmugsy wrote: »

Forget 3 except as a means to 2, because otherwise 3 can't (presumably) beat 1. (What is that guaranteed rate?)

Not stated in the documentation I have so far, but it's their 1993 rate.

kidmugsy wrote: »

I'd reject 4 because I wouldn't want to pay tax.

So would I, included for completeness.

kidmugsy wrote: »

I'd say it comes down to a comparison of 5 with 1 and 2. If the guaranteed rate is high enough, it's tempting: a guaranteed income until your death is a pretty comforting thing. You probably won't get similar returns without taking on a lot of investment risk, which in turn means that the returns aren't guaranteed. Since the annuity would be vulnerable to inflation you'd put your other investments into things chosen to protect you from inflation.

One other point: in case 5 you'd take your Tax-Free Lump Sum. In case 1 you probably would too, but if the annuity rate is stratospheric it might be worth considering not taking the TFLS (if that's allowed).

Other considerations: (i) Would you be prepared to defer your state pension a bit longer, at the expense of running down your savings a bit? (ii) Are you aware of the £5k 0% tax band for savings interest in 15-16, which will presumably continue until Chancellor Balls sweeps it away?

Yes and Yes (I'm rather counting on it for option 5)

kidmugsy wrote: »

Anyway, for certainty of capital choose 5; for certainty of income 1 (or 2).

Thank you, you've given me food for thought.

Eco_Miser

dunstonh wrote: »

option 8. The money is currently sitting in a tax free wrapper outside of your estate. if you dont need it then maybe not take it.

Not saying that is right but you have focused on taking the money out of the pension but not included leaving it in the pension wrapper. It needs to be considered as you have said that you would take it out of your pension to put into your investments. So, is it better to leave it in the pension?

Thank you for replying

What advantages does being outside my estate bring? What happens on my death?

I have no dependents or ex-dependents, my nearest relatives are a brother and his sons.

Eco_Miser

jamesd wrote: »

Best to wait until the new rules come in from April 2015 and allow taking of any amount under flexi-access drawdown. Then you can arrange to draw slowly enough so that you pay no tax, facilitated by deferring claiming your state pension so that isn't part of your taxable income.

What's the advantage of waiting, as I'll have £6-7000 of unused Personal Allowance this year.

Where I wrote flexible above, I meant flexi-access.

jamesd wrote: »

Dunstonh makes a good point about leaving the money invested inside this or another pension. ... If you have beneficiaries this may be the best route. If you don't then moving the money out of the pension and into an ISA seems likely to be better just on flexibility grounds. There's also an advantage of the ISA if you need to pay care fees, since you would already have taken the money out tax free, while if you had to do it in a hurry you may not have the same opportunity for tax planning.

No beneficiaries. Unlikely to be Inheritance Tax

jamesd wrote: »

As a person who will reach state pension age before the flat rate comes in you will have an opportunity to buy additional state pension. The announced rate is £890 to buy an extra £1 a week, inflation-linked, at age 65. That's 52/ 890 * 100 = 5.84% inflation-linked income increase. That's going to be higher than any open market annuity but maybe not higher than a guaranteed annuity rate. Beware, the guaranteed rate might be for a level annuity, not inflation-linked, and that could well start out higher.

Thanks, I'd completely missed this. 17 year payback though.

jamesd wrote: »

The same £890 would cover 6.8 weeks of your state pension for deferring. Deferring for you is at 1% increase every 5 weeks, no pro-rating for parts.

Thanks again, none of the documents I saw mentioned the no pro-rating explicitly, and mentions of 10.4% per year rather imply pro-rating.

jamesd wrote: »

One five week deferral gets you a 1% increase on £131.28, so £1.31 a week more. This means that initially, deferring buys you more extra income than buying extra state pension in this way - £1.31 plus the extra 1.8 weeks worth instead of just £1.

The cost of each extra year of income decreases as you get older but for the time period you're considering it doesn't look likely to be less good than 10.4% pro-rated for deferring, assuming that 10.4% rate continues to be available.

My inclination personally is to check the guaranteed annuity rate, then decide between that and withdrawing the money tax-efficiently to move it to ISA investments or defer the state pension.

Annoyingly the form from Phoenix (titled Pension Instruction Slip) only allows a request for an illustration of either an escalating annuity or a level annuity, and the whole thing looks like a request to take the stated annuity on the selected date.

Eco_Miser

bmm78 wrote: »

The Guaranteed Annuity Rate could be a gamechanger, or it could be irrelevant.

Thyroid issues are not on the range of conditions covered by the enhanced annuity providers, but there may be enhancements based on postcode, family health history, body mass index and a range of other things. Simple rule of thumb is to disclose everything and assume nothing. If you do a google search for an online annuity broker they should be able to quickly get some whole of market annuity quotes for you. You will then have some accurate figures to go from rather than the inaccurate and incomplete ones from MAS.

On a fund that size, bearing in mind what you've said about your other savings and investments, and factoring in State Pension deferral, I'd be inclined to lean away from an annuity unless it's a very high guaranteed rate.

Thank you for your reply.

Eco_Miser

I've now been given the Guaranteed Annuity Rate, which is £100 per £1000. So probably more than I could hope for accessing the pot and putting it in an S&S ISA, and I can still do that with any surplus income.

kidmugsy

Eco_Miser wrote: »

I've now been given the Guaranteed Annuity Rate, which is £100 per £1000. So probably more than I could hope for accessing the pot and putting it in an S&S ISA, and I can still do that with any surplus income.

If it's clear that you will fall well short of using up your personal allowance against income tax, a personal pension could be a better bet than an ISA. £80 buys £100.