Is annuity the best option.....

parcival

My other half will be 60 in a couple of months and has 3 deferred pensions payable from that date.


We both retired in our mid 50's and have been living off savings and have reasonable cash reserves. The priority with pensions is income - we do not need to turn any pensions into cash lump sums.


My pensions are due in about 8 years when I am 65 and they will be of reasonable size. I do not need to consider taking pensions early. The other half's pensions are relatively small but will mean we do not need to take as much from our savings as we have been doing.


I would welcome opinions on our strategy for her 3 pensions that are going to be payable in a couple of months.


Pension 1 - simply GMP from an occupational pension. This pension is not due until she is 65 but becomes payable at 60 because it is GMP. The GMP value is higher than the current fund value would pay if it were turned into an annuity. We therefore intend to let that pay out the GMP as is.


Pension 2 - a section 32 plan with Prudential from a former pension with Barclays. This is a 'with profits plan'. It has 3 elements. Units that are designed to cover a GMP plus units that can be used to purchase additional pension plus a final bonus. We were thinking that we should leave the GMP to pay out and then buy an annuity with the remainder (from Pru?)


Pension 3 - some AVC's that have been moved many times by company purchases but is now with ReAssure and has a fund value of almost 37k. We were thinking of buying an annuity with this.


Our thinking on annuities for her pensions is that we should go for single life (as my pensions will be much larger). We were thinking of an annuity that increases by 3% each year.


For pension 3 we have been quoted about £1200 pa for a pension that goes up 3% or £1800 for a level annuity.


I should also mention that we are both in good health.


Would be grateful for any comments as I know there are all sorts of other products that might fit the bill for us.

Linton

If you dont need the income until you reach state pension age using the money from Pension 3 to finance deferring your state pension would give a better return than an index linked annuity. For each year you defer the state pension will be increased by 5.8%.

kidmugsy

parcival wrote: »

We both retired in our mid 50's and have been living off savings and have reasonable cash reserves. The priority with pensions is income - we do not need to turn any pensions into cash lump sums.

But you might be able to avoid a fair bit of income tax by using income withdrawal before your OH's state pensions begin.

parcival wrote: »

Pension 1 - simply GMP from an occupational pension. This pension is not due until she is 65 but becomes payable at 60 because it is GMP. The GMP value is higher than the current fund value would pay if it were turned into an annuity. We therefore intend to let that pay out the GMP as is.

I wouldn't argue with that.

parcival wrote: »

Pension 2 - a section 32 plan with Prudential from a former pension with Barclays. This is a 'with profits plan'. It has 3 elements. Units that are designed to cover a GMP plus units that can be used to purchase additional pension plus a final bonus. We were thinking that we should leave the GMP to pay out and then buy an annuity with the remainder (from Pru?)

Is there a possibility of taking the GMP and converting the other two elements into a drawdown pension? That might let her exploit her personal allowance vs income tax for the next few years.

parcival wrote: »

Pension 3 - some AVC's that have been moved many times by company purchases but is now with ReAssure and has a fund value of almost 37k. We were thinking of buying an annuity with this.

That sounds to me as if it might be valuable for taking drawdown income tax-efficiently. With any money left over in pensions 2 & 3 she could fund pension deferral later, as suggested above.

parcival wrote: »

Our thinking on annuities for her pensions is that we should go for single life (as my pensions will be much larger). We were thinking of an annuity that increases by 3% each year.

Personally I'd prefer an index-linked annuity: a 3% escalation will look awfully feeble if we ever go back to a world of 24% p.a. inflation. I'd pay the extra for the index-linking, looking on it as cheap insurance.

parcival wrote: »

Would be grateful for any comments as I know there are all sorts of other products that might fit the bill for us.

The other product that sticks out a mile is making further pension contributions, and then withdrawing them again tax-efficiently. This has been discussed in multiple threads.

jamesd

parcival wrote: »

Pension 1 - simply GMP from an occupational pension. This pension is not due until she is 65 but becomes payable at 60 because it is GMP. The GMP value is higher than the current fund value would pay if it were turned into an annuity. We therefore intend to let that pay out the GMP as is.

Good plan to at lease find out what the GP is. It's probably higher than all sensible alternatives and the best choice.

parcival wrote: »

Pension 2 - a section 32 plan with Prudential from a former pension with Barclays. This is a 'with profits plan'. It has 3 elements. Units that are designed to cover a GMP plus units that can be used to purchase additional pension plus a final bonus. We were thinking that we should leave the GMP to pay out and then buy an annuity with the remainder (from Pru?)

GMP part is probably good. Annuity purchase is probably a horribly bad option and would be made even worse by buying from the Pru instead of using the open market option to shop around.

Annuity purchase at these sorts of ages is usually horribly bad because those who reach state pension age after 6 April 2016 can get a 5.8% increase in their state pension for each year that they defer taking it. that increases with CPI inflation each year. This is around twice what an inflation-linked annuity would pay and can be more than even a level annuity would pay, in reasonable health at normal ages.

The higher state pension is not inheritable but since twice the income can be bought that can be done for each person to double the income while alive, then only cut back to the annuity level after the first death, leaving the household considerably better off.

So no problem to get an annuity quote but probably a major mistake to buy one instead of deferring the state pension.

parcival wrote: »

Pension 3 - some AVC's that have been moved many times by company purchases but is now with ReAssure and has a fund value of almost 37k. We were thinking of buying an annuity with this.

Same horrible value for money issues apply here vs deferring the state pension.

parcival wrote: »

Our thinking on annuities for her pensions is that we should go for single life (as my pensions will be much larger). We were thinking of an annuity that increases by 3% each year.

Such annuities are even worse value for money than the already poor value for money level annuities. You get far more income for your money by deferring the state pension.

parcival wrote: »

For pension 3 we have been quoted about £1200 pa for a pension that goes up 3% or £1800 for a level annuity.

Today? You're far too young to be buying annuities! They start out as the worst value for money at younger ages and gradually improve in value until sometime between around age 80 and 85 they can become good value for money. £1800 level annuity is only 4.87% of the 37k and has no inflation protection at all. £1200 is 3.24%. Compare those to 5.8% inflation-linked from deferring the state pension and you can see how bad a deal the annuities are.

To generate income until you can defer the state pension there are many options. A couple of particularly interesting ones for income stability and low overall risk level are:

1. 10% a year level tax free income from buying some of the Albion Venture Capital Trust. 30% of your purchase price is refunded to you and the 10% is based on the cost after allowing for this. The 30% tax relief is limited to the income tax you actually pay in the year of purchase. So a £6,000 buy would entitle you to £1800 of tax relief from HMRC but you would only get all of that if your income tax liability for the year was at least that much. So check your expected tax bill before buying. You have to hold for at least five years or repay the 30%, unless the sale is after death. venture Capital Trusts vary greatly in their income and risk levels. This specific one is 100% secured on physical property and that's why I tend to mention it, the quite low risk level combined with the high income. To give some idea, its biggest investment for years has been a hotel at Gatwick Airport. Many of its investments are no longer allowed for new VCTs because they are too low risk. One of the managers has recommended this for retirement income and the independent reviews of the VCT are very positive about its stability and reliable income prospect. It's been running for many years, perhaps 20, I forget exactly how long.

2. Peer to Peer lending. You can get over 10% taxable from this using places like Ablrate. When P2P ISAs finally arrive, probably in April 2016, this will end up being tax free for new investments.

Lots of other options that provide good to great income levels at low risk to capital, just takes knowing about them and using appropriate levels of diversification as with all investments. Also more traditional options like commercial property funds and equity income funds, though those tend to offer lower interest and more capital value variation.

jamesd

As kidmugsy wrote, you should both be continuing to make pension contributions because you can make a nice tax gain from doing that.

If you are not withdrawing pension capital from the taxable portion of pensions to use your annual income tax personal allowance you should start to do that as well, since it's a use it or lose it allowance.

Just in case you haven't followed how pensions have changed, here's how the current pension rules work:

You can take any part of a pension pot, take 25% of that part as a tax free lump sum and place the remainder into "flexi-access drawdown". Flexi-access drawdown lets you take money from the 75% whenever you like, any amount, any time. Any money you take from the 75% is taxable as normal income. So complete freedom for you, not like the old days.

There is also something called "uncrystallised funds pension lump sum" (UFPLS). UPFPS is taking all or part of a pension pot as a lump sum. 25% of that is tax free, the other 75% is taxable. Because this is less flexible than flexi-access drawdown there is little reason to use it.

Not all providers offer these options and nothing forces them to. If one doesn't you can just transfer to one that does. For example, Hargreaves Lansdown has £0 charge for all of the ways of taking money out and changing that at any time but has a 0.45% of pension pot size platform charge, pro-rated and charged in monthly portions.

Say you had £5,000 of personal allowance unused for whoever has the AVC pension pot. You could do something like this:

A. Take 25% of the 37k as a tax free lump sum and place the rest into flexi-access drawdown, with the money invested in income funds. £9,250 lump sum, £27,750 in flexi-access drawdown.
B. Set up monthly payments from the 75% of £416.66 (5000 / 12) to use the personal allowance. These will gradually deplete the fund value, with investments compensating a bit.

If you're both in the position of having unused income tax personal allowance it's probably best to forget about VCTs for now because the 30% initial income tax allowance is important. Alternatively you could withdraw more of the taxable part of the pensions now and use the VCT to offset the income tax from that and make money along the way.

To do proper planning we really need to know how the pensions are split between you, what the occupational pension income is going to be, what your state pensions are forecast to be and what other taxable income you have. Then we can come up with a tax-efficient and investment-efficient plan to meet your needs.