Prudential With Profits Pension - Stick or Twist?

Mothman

I have a Prudential (formerly Scot Am) Ex With Profits 2 pension plan from the days when I was contracted out of SERPS. The last statement showed a fund value of £66762 & final bonus of £22545, transfer value was £89307.

The plan has a 4% guaranteed bonus rate attached to it but as far as I'm aware there is no guaranteed annuity rate. I have been holding on to it due to the guaranteed bonus rate but unsure whether I'm doing the right thing and whether I should be looking to transfer it elsewhere?

dunstonh

How does it fit with your wider retirement planning? This could be a good low risk offset to alternatives for example

Mothman

Current aged 54, also have a Freinds Life Pension (FL Managed AP fund) current value £108K and about £80K in cash ISA's.

My wife is 10yrs older than me and is already retired (gets a state pension of £7.8K). Consequently I would like to start working part-time no later than age 60 but the resulting drop in income will mean drawing on most if not all of the cash part of the portfolio, if I am to leave the pensions alone until I'm 65

kidmugsy

Mothman wrote: »

Current aged 54, also have a Freinds Life Pension (Managed Fund AP) current value £108K and about £80K in cash ISA's.

My wife is 10yrs older than me and is already retired (gets a state pension of £7.8K). Consequently I would like to start working part-time no later than age 60 but the resulting drop in income will mean drawing on most if not all of the cash part of the portfolio, if I am to leave the pensions alone until I'm 65

(i) Is there a good reason to leave the Friends Life pension untouched to age 65? After all, it will be available to you within a year should you want access.

(ii) A return collared at 4% p.a. is surely a pretty fine component of a portfolio for someone in his 50s; you can think of it as a particularly advantageous bond part. Is the final bonus guaranteed or might part of it be lost in a market crash?

(iii) Is your wife due further pensions later? Has she got any income at the moment beyond her state pension?

(iv) Have you considered moving some of your cash savings out of ISAs and into high interest current accounts?

xylophone

You will become eligible for state pension in the new scheme - you might wish to obtain a pension statement after you reach 55.

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

https://www.gov.uk/calculate-state-pension

You could access the Friends Life pension when you are 60 (or indeed before) if you wished?

Mothman

Thanks for the replies. I was trying to leave the FL pension alone until 65 if I could. The scheme doesn't allow drawdown and so I would have to transfer out to another scheme if I wanted to do this, also I had been told that returns from drawdown funds were low, though not sure if this true?

In answer to the other points raised

1. The Pru final bonus isn't guaranteed
2. My wife doesn't have another pension or any other income.
3. Have opened a Santander 123 account and this is being used as our main savings vehicle this year
4. I have already obtained a state pension forecast of £140pw which I will get aged 67

kidmugsy

Mothman wrote: »

Thanks for the replies. I was trying to leave the FL pension alone until 65 if I could. The scheme doesn't allow drawdown and so I would have to transfer out to another scheme if I wanted to do this, also I had been told that returns from drawdown funds were low, though not sure if this true?

In answer to the other points raised

1. The Pru final bonus isn't guaranteed
2. My wife doesn't have another pension or any other income.
3. Have opened a Santander 123 account and this is being used as our main savings vehicle this year
4. I have already obtained a state pension forecast of £140pw which I will get aged 67

(0) If you are going to get State Pension at 67 and hold the Pru pension until 65, there's a case that you might like to take some of the FL pension earlier e.g. at age 60. (See below for some other possible uses for the dosh.)

But, on the other hand, it's tucked up in a tax shelter, so if you don't need the money you could just leave it there. My own instinct is to assume that income tax rates will eventually rise, so that there's something to be said for taking out income at 20% tax while it's still 20%, and putting the surplus money into ISAs. Similarly there's something to be said for getting the tax-free lump sum while it's still tax-free and unlimited in amount.

(1) So there is a case for transferring the Pru pension and investing it in something that won't crash if the market crashes - e.g. short-dated Gilts. On the other hand there's also a case for leaving be since the loss in a crash is limited to about 25% and the 4% p.a. guarantee is good to have. My instinct might be to leave the Pru alone and try to time the markets, and use the money more effectively, with the FL pension - which would mean transferring it. So you'd have to check whether you'd lose any advantages, and whether FL would charge for the transfer.

(2) Then your wife is a tax-shelter (be sure that she's in a good mood when you tell her this news). One good idea would be to start contributing £2880 each year to a pension for her while you can afford it: the pension provider claims from HMRC and the "pot" is made up to £3600. Then she can later withdraw the 25% tax-free lump sum; she can also withdraw up to about £3k tax-exposed but tax-free in future tax years while her Personal Allowance is about £3k higher than her income. This might be a an effective way to save for the reduction in household income when you stop work or move to part time work.

She could also consider suspending (they call it "deferring") her State Pension for a couple of years: the reward is 10.4% extra pension for each year of deferral. The reward will be only 5.8% p.a. for you when you retire.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

(3) Congratulations: we're considering opening one of those.

(4) That means that at 67 the state pension and your private pensions combined are likely to exceed your personal allowance so you'll be paying tax on part of your income. That's why it's a good idea to try to move some income to your wife, so that she can use up her personal allowance too.

agarnett

With-profits contracts can be interesting "keepers" for a variety of sometimes not so obvious reasons.

I have found it useful to ask questions of my provider to more fully bound, for example:

• Exactly how the final bonus is calculated
• Exactly what regular charges are being applied (e.g. a 1% annual management charge and a small monthly policy charge might be common). This I think could mean that the guarantee is effectively less than 4%.
• Exactly which other bonus may have been applied and may yet be applied as "special distribution" of inherited estate. In 2007/8 I think it was, Prudential identified substantial "surplus" in the estate of their WP funds and manoeuvred to "reattribute" it (as did AXA / Friends Life and Aviva) but the Pru backed down, which suggests there may still be significant surplus to distribute for those policyholders who last the longest!

atush

Isn't the pru pension already safe from market crashes as it is withprofits (although the terminal bonus could go down)? Our WP pension did not fall during the crash.

kidmugsy

atush wrote: »

Isn't the pru pension already safe from market crashes as it is withprofits (although the terminal bonus could go down)? Our WP pension did not fall during the crash.

That's the whole point: the terminal bonus could go down. Note that it makes up about 25% of the transfer value. Also if he eventually wants to transfer, there might be an MVR at some point in future. It would pay the OP to study his T&Cs carefully: they might make a mockery of my guess that it might be worth leaving the Pru pension alone.

atush

The one I have doesn't show terminal bonus on t he statement, just already made annual ones (the terminal bonus rate is only declared in the year cashed in)? So are we sure the bonus mentioned is terminal?