IFA charges for annuity

jamesd

ivavoucher wrote: »

Unfortunately if you take the 40% tax free cash you are then forced to buy an annuity with the remainder.

Why are you forced? It may be that the only option that this provider offers is an annuity but that doesn't usually mean that you have to buy an annuity, a transfer of the 75% in normal cases would be possible. I'm not very familiar with this particular type of product but don't know of anything about it that bans you from using the usual option of transferring out the 60% to use drawdown.

If you are compelled to buy an annuity to get the 40%, that may be too high a price to pay, given the generally poor value for money for income that annuities offer.

ivavoucher

macca1974 wrote: »

If you've got an EPP (with the Pru? who I think had the old Premier plan), and you have protected tax free cash in excess of 25%, I thought that if you transferred out (which I think would include an open market option to get the best annuity rate), then you had to take the annuity offered by the provider. So it may be that you are stuck with your existing provider for an annuity if you want the 40% tfc. Although I would say it has been ages since I've had anything to do with this so I might be completely wrong!

You don't by any chance have any former colleagues who were (and still are) in the same EPP? If you did and you transferred to a more flexible scheme together (a buddy transfer) then you could retain your 40% tfc and get into a more flexible scheme.

In answer to your question, it used to be 1% or so commission on an annuity pre-RDR, so that might be your starting point with an adviser.

Thank you.

Yes it is EPP with Pru.
I can go to open market for the annuity whatever % I take and if I only take 25% I don't have to go to annuity at all.
I can't do the buddy option but it's a shame because for the last 12 months I could have done this as a singleton, but that's past by now. I believe the option just ran for the last 12 months.

jamesd

Being compelled to take the annuity then seems like far too high a price to pay for the extra tax free lump sum.

If you just want the money out tax free it's probably cheaper to do something like buying VCT shares to get the 30% income tax relief for sufficient of the income to eliminate your income tax liability.

Starting with a pension pot of £362,500 you could do something like this:

1. take a 25% tax free lump sum of £90,625 (instead of the £145,000 t 40% lump sum).
2. then you need to avoid the tax on £145,900 - £90,625 = £55,275 to avoid a tax loss. Assuming that you're content to do this gradually so only basic rate income tax is paid, the tax to save is 20% of that, so £11,055.
3. buying a total of £26,850 of VCT shares will generate 30% income tax relief and match the income tax gain from the larger tax free lump sum. You buy the VCTs out of the taxable income, though it's handy if you have the money to pay in advance.

Given the pension pot size it doesn't seem unreasonable to consider having £26,850 of VCT shares for the five year minimum holding period. You'd also get around 5% or so tax free income on the £26,500 if you choose fairly typical generalist VCTs.

If you've read that VCTs are high risk you might take a look at those that invest by doing lending secured on property. Something like the Albion Venture Capital Trust has all of its investment backed in that way. there's a big risk range available in VCTs and this one is at the lower end.

If you need the lump sum or won't be paying higher rate income tax the calculations change a bit to allow for that because you'd need to buy more VCT from the taxable portion to cover the income tax paid.Easy enough to do, just takes running the numbers through the calculations to find out he income tax paid and VCT buy needed to cover it.

That lot gets you out of the low income for the money trap of the annuity without ending up costing you the tax saving or access you might want for the 15% tax free lump sum difference.