Can you have an annuity at 63 with a personal pension?

buel10

Hi.

A friend of mine mentioned that his brother is 63 and has an annuity. I asked if this was possible if he wasn't yet 65 (I am naive) and he said it was a personal pension. I didn't realise that this was possible?

Also, my friend was saying how his final salary pension 'is an annuity' so he was very interested in the news of annuities being 'purchased' in order to get a lump sum. Again, I wasn't under the impression that final salaries were annuities?

Please could I have some thoughts?

jem16

buel10 wrote: »

Hi.

A friend of mine mentioned that his brother is 63 and has an annuity. I asked if this was possible if he wasn't yet 65 (I am naive) and he said it was a personal pension. I didn't realise that this was possible?

You can access your pension from age 55 so yes it's possible to have an annuity at age 63 and many do have.

Also, my friend was saying how his final salary pension 'is an annuity' so he was very interested in the news of annuities being 'purchased' in order to get a lump sum. Again, I wasn't under the impression that final salaries were annuities?

Final salary pensions do not have annuities. They are Defined Benefit pensions with guaranteed benefits, one of which is a monthly pension.

They are not covered under the new rules, nor with the possible selling of annuities.

buel10

Thank you for that!!

jamesd

It's possible to buy an annuity at 63 or younger, even as young as 55, but it's not usually going to be very clever. that's because annuities tend not to start to become good value compared to the alternatives until some time in the age 75-85 range.

Before that one option that is often excellent is taking the money and using it to fund deferring the state pension. For those who reach state pension age before 6 April 2016 the state pension is increased by 10.4% for each year of deferring after they have reached state pension age. Around 75% of that is inheritable by a spouse and it all increases with inflation. At 65 an annuity for someone in normal good health would pay something in the 2.5-3.5% range for inflation-linked income.

For those who reach state pension age from 6 April 2016 the increase for deferring is 5.8% and not inheritable. Still considerably better than normally available annuities.

For those who haven't reached state pension age yet it's necessary to allow for the cost of providing an income for the extra years until they do, so the final income after doing that and deferring can be compared to what an annuity would provide.

There's also the option of simply continuing as you were, taking money from the investments in a pension pot, called income drawdown.

Personally I think that it would be a good move for a lot of people to use the option to defer the state pension and few of those within a few years of reaching state pension age to buy an annuity.

If you know anyone else anywhere close to state pension age please do make sure that they know just how good a deal deferring the state pension is, particularly compared to buying an annuity.

buel10

Thank you again.

Regarding my friend and his final salary - I explained to him what was posted and his response was "They don't know what they're on about" and claims that his is a company final salary pension and that "the rules changed last year" and that he will be able to transfer it to a defined contribution pension?
Please does anyone know what he means?

dunstonh

I explained to him what was posted and his response was "They don't know what they're on about" and claims that his is a company final salary pension and that "the rules changed last year" and that he will be able to transfer it to a defined contribution pension?

Your friend doesnt know what he is on about I'm afraid.

1 - there were no rule changes last year on defined benefit pensions. He was able to transfer the pension before he commenced it previously and could do so in future. (although some schemes are limiting transfers out).

2 - once the pension income has commenced, he is locked into the scheme unless the trustees are willing to unwind it. Technically possible but something rarely carried out.

3 - the rule changes proposed last year and coming in to effect next month are for money purchase schemes. Not final salary schemes.

buel10

I appreciate what you say, thank you.

If I may, the only other question he asks is if he does transfer his pension, will he be taxed on this? If and when he then withdraws this, is he correct in thinking that he will get a 25% tax free lump sum?
He is 54.

jem16

buel10 wrote: »

If I may, the only other question he asks is if he does transfer his pension, will he be taxed on this?

He'll not be taxed on transferring. However any income taken from it, other than the 25%, will be taxable.

If and when he then withdraws this, is he correct in thinking that he will get a 25% tax free lump sum?
He is 54.

So presumably this friend is not yet taking his final salary pension?

Are you sure he realises that transferring out of a final salary scheme is likely to be a very bad idea? Who is his pension with?

atush

First of all, this is all over the place. And your friend is a bit of a numpty.

If he has a final salary pension HE HAS NOT STARTED TAKING YET he could transfer it to a DC pension (if it isn't an unfunded public service one). But 95 times out of 100, it would not be the right thing to do. AS it is very valuable esp if you have a spouse and are of good health.

If he has started taking his pension, he cannot transfer it.

If the pension was transferred to a DC scheme, then yes he could with draw the funds, 25% tax free and the rest taxed. And the tax bill could be HUGE if withdrawn all at once as he could pay 40% even 45% in tax. which makes the idea of a transfer even more un advisable.

buel10

atush wrote: »

First of all, this is all over the place. And your friend is a bit of a numpty.

If he has a final salary pension HE HAS NOT STARTED TAKING YET he could transfer it to a DC pension (if it isn't an unfunded public service one). But 95 times out of 100, it would not be the right thing to do. AS it is very valuable esp if you have a spouse and are of good health.

If he has started taking his pension, he cannot transfer it.

If the pension was transferred to a DC scheme, then yes he could with draw the funds, 25% tax free and the rest taxed. And the tax bill could be HUGE if withdrawn all at once as he could pay 40% even 45% in tax. which makes the idea of a transfer even more un advisable.

To be fair, I don't think I said he is taking his pension, I think you might be referring to his friend that I mentioned in my original post.

That said, thank you all for some wonderful advice. Yes, my friend may well have been 'uninformed', shall we say, but you may be pleased to hear that he has now calmed down and is far less defensive and really appreciates your advice. I have repeatedly told him not to get tempted by the 'shiny shiny' and stick with his final salary pension.


One more thing, he has mentioned tear down as an option IF he did transfer and withdrew his pension. Would this be viable?
Oh and he is 55, apologies.

xylophone

One more thing, he has mentioned tear down as an option IF he did transfer and withdrew his pension. Would this be viable?
Oh and he is 55, apologies.

Draw down?

And he might have tears running down his face if he transfers out of his final salary pension....

http://www.pensionsandannuities.co.uk/Risks%20of%20Pension%20Unlocking.htm

"Probably more than any other type of scheme, the greatest risks and biggest disadvantages, come from unlocking and releasing cash from a final salary scheme.

Final salary schemes provide an income in retirement that is linked to your length of service and earnings. It is the scheme's and your employer's responsibility to ensure that the pension scheme has sufficient funds to pay the pensions. If the scheme does not have sufficient funds then the employer must take steps to address this. The investment risk, inflation risk and risks about how long the pensions must be paid is not yours but your employer's responsibility. So provided your employer can fund the scheme, your pension should be secure.

Even if your employer becomes insolvent and the scheme can not afford to meet its liabilities then there is a "back up" scheme in place to protect you, this is called the Pension Protection Fund . The level of protection varies; if benefits are in payment then it would provide 100% of the income and for members not yet taking an income it would be 90% of the pension. There is also an upper limit and other limitations too, see the compensation limits of the Pension Protection Fund. This scheme is funded by a levy/charge against all such pensions and not funded by the Government.

Remember that final salary schemes can also provide benefits for dependants, such as a wife, partner or child and the benefits normally have some sort of inflation protection too. If you transfer your benefits out of these schemes, these benefits could be lost or reduced. Remember, even old final salary schemes are not "frozen" they are, in fact, deferred pensions and usually have some inflation proofing or other increases. They are not really "frozen" they will normally be increasing in one way or another and sometimes at a rate far above inflation.

So, even though it is possible to unlock a final salary scheme by transferring the fund away, you would be giving up some very valuable benefits which are backed by your (former) employer and the Pension Protection Fund. See cashing in a final salary scheme.

Taking benefits early direct from a final salary scheme (if possible) will usually mean significantly reduced benefits too, usually a smaller lump sum and/or smaller income."

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332714/pensions_response_online.pdf

See page 25 of above.

If he succeeded in transferring out to a personal pension, then drawdown could be a possibility.