Should I cash in a small annuity to pay off the mortgage?

Too_many_pets_live_here

I'm not sure what to do. I have a very small annuity which I could use to pay off the last £4000 on my mortgage. As it stands the annuity is supposed to be a pension of about £200 a year! As my pension won't be substantial my idea was to clear my debts and work part time somewhere.
I'm not sure where to go to get unbiased advice. You all seem to be so knowledgeable, I'm hoping someone can point me in the right direction.

I'm 63 this month. Sorry, I made a mistake.....its a personal pension plan that is waiting to be converted into an annuity. Its worth about £5000 which when invested will provide a pension of £180 per year. I will also have a local authority pension and a small NHS pension. I'm a basic rate taxpayer.

Thank you everyone. I thought it would be a good idea to kill off the last of my mortgage, work part time and get involved in charity....but not for the tax man! I appreciate you all taking time to advise me and making me realise it's not a straightforward as I thought. Oh well back to the grindstone for another year or two.

atush

Do you have a pension, or an annuity? How old are you?

dunstonh

Should I cash in a small annuity to pay off the mortgage?

You cant. An annuity is cast in stone once purchased.

As it stands the annuity is supposed to be a pension of about £200 a year!

What you describe sounds more like a pension than an annuity. An annuity is one of the things you can by with a pension to provide an income. The pension is the investment fund that gets you to retirement.

dunroving

Too_many_pets_live_here wrote: »

I'm not sure what to do. I have a very small annuity which I could use to pay off the last £4000 on my mortgage. As it stands the annuity is supposed to be a pension of about £200 a year! As my pension won't be substantial my idea was to clear my debts and work part time somewhere.
I'm not sure where to go to get unbiased advice. You all seem to be so knowledgeable, I'm hoping someone can point me in the right direction.
Thanks so much for your help.:)

Are you over 55?

Do you realise you will pay tax on 75% if you take as a lump (assuming you are currently in employment and a tax payer)?

What is the current value of the pension?

Have you contacted the pension company to ask about charges or penalties to liquidate?

I think it would be easier to answer your question knowing this information.

On the face of it a £200 p.a. pension is almost more of an inconvenience than it's worth.

jamesd

Too_many_pets_live_here wrote: »

As it stands the annuity is supposed to be a pension of about £200 a year! ... I'm 63 this month. Sorry, I made a mistake.....its a personal pension plan that is waiting to be converted into an annuity. Its worth about £5000 which when invested will provide a pension of £180 per year. I will also have a local authority pension and a small NHS pension.

When do you reach state pension age? Deferring your state pension is normally going to be a better option but the way it works changes depending on whether it's before or after the flat rate comes in.

State pension age before 6 April 2016: your state pension increases by 10.4% per year of deferral, pro-rate for shorter times. If you have a spouse at least 50% of the increase is likely to be inheritable by them.

State pension age from 6 April 2016 onwards: your state pension increases by 5.8% per year of deferral, pro-rated for shorter times. No inheritance.

Because those rates are inflation-linked they beat both annuity purchase and overpaying on a mortgage. This means that your best option is probably to draw on the pension lump sum to provide the same extra income as your state pension would provide, while deferring claiming the state pension.

Since you don't yet have all of your pensions in payment you might also want to draw on the pension pot at a higher rate to top up your income to the final level sooner. If you tell us the anticipated pension levels for all pensions and when they are due to start, including the state pension, we could work out a more specific plan.

Using the rules that apply from 6 April 2015 you an draw the whole pot or any part of it at any time. 25% is available as a tax free lump sum, the rest taxed as normal income. Two ways of doing this: uncrystalised funds pension lump sum (UFPLS) where you take out some part or all and it's 25% untaxed and 25% taxed. Or flexi-access drawdown where you can take out the whole 25% tax free lump sum at the start and the rest over time. UFPLS doesn't give you that flexibility, it's always a 25%:75% split. Not all pension schemes will offer both options or even either, if what you want isn't offered you can just transfer to a pension that does allow it.

jamesd

You don't need to wait until April if you don't want to. A value of £6,000 is less than the small pot limit of £10,000 so you could take it all out now unless you have already used this rule for three personal pension pots. It'd be a 25% untaxed : 75% taxed split if you did this.

You mentioned debts. is that just the mortgage or what other debts do you have at which interest rates? If you can give us a list of amounts and interest rates that'd make it possible to suggest a more specific plan.

atush

Given your age, and the size of the pot you probably could take it now, about as said above 75% of it would be taxed as income- what rate do you pay?

I would hav said what wil you live on if this is your only money, but you do have other pensions to come.

It does sound like you are short of savings though, so if you are still working i'd be saving harder before you retire?