Fixed term annuity

johnbfan

My husband saw a financial person through Pension Wise. The person explained to him some of the products available now he is 65 and sorting out his occupational pension.

One of the products was fixed term annuities with a 25% tax free lump sum upfront and a lump sum at the end of the term, rather than a life time annuity. My husband is interested in going down this route because, although he would prefer drawdown, he doesn't have the financial skills to invest his pot for drawdown.

The fixed term annuity would probably be for five or ten years, but he is concerned about the lump sum that will be left at the end of the five year term.

Will the end lump sum be taxable, and if so at 20 or 40%. He has a state pension, an very small private annuity, and a part time evening job, so is already paying a little bit of tax.

kidmugsy

I think that the lump sum when the annuity ends remains in a pension tax shelter. So he can decide then to buy another fixed term annuity, or a lifetime annuity, or do drawdown.

I suppose it's a way of getting hassle-free income now without tying yourself to current low rates for the rest of your life.

mania112

Fixed Term Annuity is written under Drawdown rules.

You normally take 25% out and then maybe a fixed income (optional) - at the end of the term you will have a known value, with which you have the same options again: Flexi-Access Drawdown, Lifetime Annuity... and the variations of both.

It's primarily seen as a way to defer making your final decision. In my experience Fixed-Term Annuities tend to be expensive (the return at the end of the term is usually unlikely to be as high as it would have been if you'd taken the conventional Drawdown option).

I'm therefore not a fan of Fixed Term Annuities because if you're not comfortable with an Annuity you should utilise Drawdown to its fullest extent (leave the plan flexible, and make the most of being able to invest your pot).

You can have a financial adviser arrange the plan (and investment) for you.

dunstonh

My husband saw a financial person through Pension Wise.

I wouldnt go as far as saying they are a financial person. A couple of training sessions on generics makes them less qualified than a number of the consumers posting here.

The fixed term annuity would probably be for five or ten years, but he is concerned about the lump sum that will be left at the end of the five year term.

What about a lifetime annuity with value protect? Did pensionwise mention these? That avoids renewals and ensures a lump sum should there be early death.

although he would prefer drawdown, he doesn't have the financial skills to invest his pot for drawdown.

What about getting an IFA to do it?

johnbfan

Going to have to be a good return on drawdown investments to pay an IFA everytime and make the pot grow.

dunstonh

johnbfan wrote: »

Going to have to be a good return on drawdown investments to pay an IFA everytime and make the pot grow.

The cost of an IFA is not that high.

xylophone

Had he considered deferring the state pension and taking the PCLS from his occupational pension and using that with his part time income/small private annuity to cover income needs until he gives up part time work? He might then not be paying tax?

https://www.gov.uk/deferring-state-pension/what-you-may-get

https://www.unbiased.co.uk/ Re IFA.

mania112

johnbfan wrote: »

Going to have to be a good return on drawdown investments to pay an IFA everytime and make the pot grow.

Are you suggesting that you'd rather have less yourself just so that you don't have to pay an IFA?

johnbfan

Its my husbands choice as to what he does with his occupational pension, he wants to do drawdown if he can but being rubbish with finance, he has to have all the facts before he can make a decision. He's started to receive the state pension because of unemployment

kidmugsy

johnbfan wrote: »

Its my husbands choice as to what he does with his occupational pension, he wants to do drawdown if he can but being rubbish with finance, he has to have all the facts before he can make a decision. He's started to receive the state pension because of unemployment

Atush's point is this. The best value annuity he can buy is Extra State Pension, which he can buy by suspending (they call it "deferring") his State Pension. It pays 10.4% extra pension for every year of deferral, index-linked, and largely heritable by you if he dies first. You'll see that that is a far higher rate than any he'll get commercially. (It's so ludicrously expensive for the taxpayer that it will be reduced to 5.8% for people reaching State Pension Age from tax year 16/17 onwards).

He could fund the absence of a state pension during deferral by spending out of his tax-free lump sum, or by drawing down out of his pension, or both. That might mean holding that pension in cash for the moment rather than investing it in shares and so on. Or, if he finds an IFA he is happy with, he might like not to hold the money in cash but to invest it in accord with the IFA's advice.

In other words, he's in a pretty good position to get good value for his money. In addition to deferring his pension he could buy a State Pension "top up" (available from this autumn to March '17) which is poorer value than deferral but better value than commercial annuities. Again, this means he's in a good position.

If he goes to an IFA who does not mention Pension Deferral or Pension Top-Up, change your IFA. These deals are attractive for anyone who is leery of managing investments.

jamesd

I'm assuming that his occupational pension is in the invested type, not a defined benefits one like final salary or average salary.

For this type of pension pot the highest available income is normally obtained by deferring the state pension and drawing income from the pension pot while deferring the state pension. This gets a person who reaches state pension age before 6 April 2016 an increase of 10.4% of their state pension per year, an increase which is close to three times the rate you'd get from buying an inflation-linked annuity.

There's a catch: if you're a financial adviser you get paid no commission for selling state pension deferral, but you do (and have to tell your customer) for selling an annuity. Also, state pension deferral seems to have been mostly something that advisers just aren't used to considering at all, so it seems to be ignored even when it's the highest paying option. Neither of those things applies here - we don't get paid anyway and we are well aware of just how good a deal state pension deferring is, so it's usually what we'll suggest first for higher guaranteed income.

If you can tell us his pension pot size and state pension income one of us can put together a plan to illustrate how to do pension deferring and drawing from the pension pot while doing it.

Most of the increased state pension from deferring is inheritable by a spouse. All of the proportion on the basic state pension and some on the rest, depending on just which years are involved. It's likely to be around 75% inheritable by you.

One of the good things about state pension deferring for him is that the income is well above the safe income level for drawdown, so he can not only get lower investment risk, he also gets higher safe income level. Around 4% of the pot size, increasing with inflation is the common suggestion for drawdown income. Even the latest research and rules on when to change based on market results only get that up to maybe 6.5%. Ironically even if he wanted high inheritance as a factor, he could probably get it higher by taking the higher income and investing the difference!

Please also mention anything that would affect his life expectancy, just in case that's a factor. It's unlikely that it's so reduced that an "enhanced" annuity would beat state pension deferring but it does need to be checked, just in case.