Annuity or lump sums?

daviecol

Hi I'm mulling over the pension dilemma and would appreciate any thoughts. I'm only 48 so there's no hurry lol.

I'm a bit confused about annuities, I have a small pension pot at the moment of 72000 hopefully this will be slightly higher by the time i'm 55 or later depending on what i do.

I earn around 28000 a year, my wife works part time and will not have a private pension so I want her to share mine. I have used the legal and general annuity calculator to get an idea of what my options are. If I take a 100 percent joint annuity out at 67 I can take an 18000 tax free lump then 2100 a year increasing by 1 percent a year till we're both dead.

So one of us would have to live to be 92 just to get our money back? This seems a bit well tight on their side.

I'm half wondering if i should wait till i'm 55 then take the tax free lump and each year after take around 5000 each year after till i have it all in a building society account. Then when I retire at 67 I can be my own pay master and take so much a month to live off?

Obviously there are risks and tax issues. I would appreciate any thoughts on the matter. By the way I'm very careful with my money, I certainly wouldn't be tempted to just spend willy nilly.

dunstonh

So one of us would have to live to be 92 just to get our money back? This seems a bit well tight on their side.

Not really as they take into account life expectancy and as its joint, it is not unreasonable to expect one of you to make 92. Did you include any other death guarantees?

However, L&G rates are not exactly marketing leading. So, it would probably end up better than that when you get there.

I'm half wondering if i should wait till i'm 55 then take the tax free lump and each year after take around 5000 each year after till i have it all in a building society account.

That would be utterly pointless. You would be taking money out of a tax free wrapper and putting in a taxable deposit account. You would have over a decade to retirement and suffering shortfall risk and inflation risk when it should still be invested.

Then when I retire at 67 I can be my own pay master and take so much a month to live off?

Which you can do with the pension for more tax efficiently than what you propose. Just by using drawdown instead of an annuity (an option that has been available for a decade).

greenglide

..... and at the age of 48 you do not have to decide how you will access the money at pension age. You must do all you can to make the biggest pension savings you can.

Why are you not making pension contributions for your wife? Even if she has no earnings you can put in £2,880 which is grossed up to £3,600 which if her total income after retirement is below the income threshold can be obtained without any tax.

daviecol

greenglide wrote: »

Why are you not making pension contributions for your wife? Even if she has no earnings you can put in £2,880 which is grossed up to £3,600 which if her total income after retirement is below the income threshold can be obtained without any tax.

Because like the vast majority of the people in the uk I have almost no idea about these things, which is why I'm trying to get my head around it now. lol

xylophone

Why does your wife have no pension provision? Is it because she has no relevant earnings?

Even if so, as Greenglide points out, she may invest up to £2880 per annum into a personal pension and receive tax relief of £720, bringing the total contribution to £3,600 per annum.

If she has relevant earnings but not enough to pay tax, she may invest up to 100% of her earnings (net) into a personal pension and receive tax relief.

For example, if she earns £8000 a year, she can contribute £6400 to a personal pension and receive tax relief of £1600.

http://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/

If she is employed, but there is no pension scheme, then at some point over the next two years her employer will have to offer one.

daviecol

xylophone wrote: »

Why does your wife have no pension provision? Is it because she has no relevant earnings?

If she is employed, but there is no pension scheme, then at some point over the next two years her employer will have to offer one.

She earns £5000 a year. I thought you had to earn £10000 before your employer had to offer a scheme?

xylophone

They must automatically enrol you if you earn over £10000 a year but if you earn less, you can still ask to join.

https://www.moneyadviceservice.org.uk/en/articles/automatic-enrolment-if-you-earn-up-to-gbp9440

xylophone

After the new state pension arrangements start in the next tax year, you and your wife can obtain pension statements to help with retirement planning.

https://www.gov.uk/new-state-pension/overview

daviecol

xylophone wrote: »

After the new state pension arrangements start in the next tax year, you and your wife can obtain pension statements to help with retirement planning.

https://www.gov.uk/new-state-pension/overview

Yes i got a statement for the wife a few months ago, she has 24 qualifying years. I'm going to pay class 3 nics so she gets the full state pension, but was advised not to start till 2016 because of the changes coming.

atush

So, your wife could put up to her entire salary into a pension each year. If you couold afford to/want to.

And while thinking about what you want to do with your money, and when you hope to retire is important- I would spend a little time both reducing spending and increasing pension contribs (esp for the wife) while you still have plenty of time.

If you aren't sure where to cut back, each of you do a spending diary for a few months, Everything you spend be it cash or otherwise and parking fees or a coffee, write it down. You will soon find places to cut back.

jamesd

daviecol wrote: »

Hi I'm mulling over the pension dilemma and would appreciate any thoughts. I'm only 48 so there's no hurry lol.

Well, you might decide that you want to retire nice and early and get keen on planning to do that.

daviecol wrote: »

I have used the legal and general annuity calculator to get an idea of what my options are. If I take a 100 percent joint annuity out at 67 I can take an 18000 tax free lump then 2100 a year increasing by 1 percent a year till we're both dead.

Or you can spend some of your pension pot and get a 5.8% increase in your state pension per year deferred, which increases by inflation for life. This is not inheritable by a spouse but it's around twice the income that an inflation-linked annuity will pay so you can both do it and have twice the extra income for your money while you're both alive.

Or you can do some of that and some income drawdown, which just means taking an income from investments. Since the investments aren't sold then the money spent it's fully inheritable by a spouse. Tax free for a spouse or anyone if you die before age 75, otherwise taxable at their normal income tax rate. A commonly quoted guideline is that with drawdown you can take 4% of the initial pension pot size as income and increase it with inflation each year while having a low chance of having to cut back later. More detailed rules which pay more attention to inflation and investment performance can increase that to 6% initially, but will not increase it beyond caps in bad investment or inflation years, so it'll gradually drop back over your retirement, but still probably staying well over 4% and even more over what an annuity would pay. The key catch to drawdown is that you do need to take time to learn about investments and need to monitor it a bit. Plenty of time for you to do any learning that you think you need.

daviecol wrote: »

So one of us would have to live to be 92 just to get our money back? This seems a bit well tight on their side.

Standard lifetime annuities at normal ages are poor value for money once you know about the alternatives. Inflation-linked ones are even worse. It's not that annuities are an inherently bad idea, it's just that there are better deals around.

daviecol wrote: »

I earn around 28000 a year, my wife works part time and will not have a private pension so I want her to share mine.

Each individual gets their own income tax personal allowance. Pension income is taxable. For this reason when you're both in the same income tax bracket it pays to split the pension contributions enough to fully use her personal allowance in retirement, saving that 20% income tax on the income.

It is possible that using her employer's auto-enrolment scheme is a bad idea. The problem would be if it uses "salary sacrifice" to save NI as well as income tax. Because of her low income she's paying neither income tax nor NI so she'd get no tax relief at all if a salary sacrifice scheme was used. If it's not salary sacrifice it'd be fine. If it is salary sacrifice the solution is easy, she can just start her own pension outside work and pay into that instead. Then she'll get the 25% added to give her 20% basic rate tax relief even though she isnt' paying any income tax - she's still entitled to it.

daviecol wrote: »

I'm half wondering if i should wait till i'm 55 then take the tax free lump and each year after take around 5000 each year after till i have it all in a building society account. Then when I retire at 67 I can be my own pay master and take so much a month to live off?

If you did that you'd have much less to live off because savings accounts pay far less than the likely growth of investments. Average UK stock market growth over the last hundred plus years has been about 5% plus inflation. The savings accounts would usually barely keep up with inflation, if that.

What you can do usefully is take the tax free lump sum at 55. This has some useful advantages but the most interesting ones for you is that you can use it to help fund pension payments for her and perhaps also use it to increase your own pension contributions. You can do this with up to £7500 a year of lump sum with no hassles, if you want more than that it takes a bit more care to work around recycling rules. Ask nearer the time about the rules that apply then. The key thing here is that you're investing the money again and not losing tax breaks, so you end up better off, not worse off.

If I told you that you can get 10% tax free income on your money and 30% back from HMRC this year via a new tax code would you be interested?

No need to wait as for pension tax relief, you get that 30% this year and the ongoing tax free income. The secret to this is venture capital trusts. There's a nice deal on one secured on property at the moment, the Albion VCT. Say you bought £6,000 worth, the sort of amount that is extremely common for VCT buyers. You'd tell HMRC and they would send your employer a new tax code to give you the £1,800 of income tax reduction you're entitled to, via less income tax on your pay. This is capped at the income tax due for the year so if your income tax would only be £1,000 that's all you'd get back. Then twice a year you'd get a tax free dividend payment of about 5% a time directly into your bank account. You have to not sell for at least five years or repay the 30% tax relief, though this doesn't apply if you were to die. The income isn't guaranteed, nor is the capital value of the purchase but independent reviews say that it is all well supported and likely to be reliable and the place has been around for a couple of decades already.

Venture capital trusts vary in their risk levels. I've mentioned one of the lowest risk ones around because of the property that secures all of the lending that it does to the places it invests in.