Pension pot decision query

Grouchy

I just want to see if I understand this correctly and it is as simple as I figure. I'm removing any consideration of 'can I afford to support myself on retirement ...' etc to make it a simple example:

I am 60 retired, no income except interest from savings. I have to decide on various options with pension pots. One has a current value of £21k and at present is calculated to give an annual income of £500 taxable from when I reach retirement age. (I understand this is variable and can change over time).

So, does this mean (assuming the value of the pension and the annual payout remains rougly the same for argument sake) that I would have to live 40 years past retirement age to receive back my contributions to the pension?

If I cash in this pension pot and put the £21k into an account with say at current interest rate 1.5% then that would give me approx £300 interest per year taxable. And so: I would get a small(er) income earlier and b) I would have the £21k on hand if needed.

I have a common law OH and all finances are in one pot so to speak in both names.

Have I missed something vital in this ?

Thanks in advance

dunstonh

One has a current value of £21k and at present is calculated to give an annual income of £500 taxable from when I reach retirement age. (I understand this is variable and can change over time).

And its artificially lower than what is realistic for that size of figure.

So, does this mean (assuming the value of the pension and the annual payout remains rougly the same for argument sake) that I would have to live 40 years past retirement age to receive back my contributions to the pension?

No. As its highly unlikely you would draw an income of just £500 p..a on £21k.

If I cash in this pension pot and put the £21k into an account with say at current interest rate 1.5% then that would give me approx £300 interest per year taxable.

Why take money out of a tax free wrapper to put it into a taxable position?
Why put it in a savings account earning pittance when you can leave it in the pension to earn more tax free?

Have I missed something vital in this ?

Yes. You have taken the lowest example of income and assumed it was the norm or the only option possible from the pension. Plus, you have compared it to the high risk option of using cash savings to provide a long term income.
You also forgot the tax as you would not get £21k in a savings account.

Paul_Herring

Grouchy wrote: »

So, does this mean that I would have to live 40 years past retirement age to receive back my contributions to the pension?

Are you presuming that the whole £21K is just your contributions, as opposed to - say - growth on top of what contributions you've put in.

Or do you mean "... to receive back the amount currently in the fund."

Do not conflate the two.

Either way, as DH pointed out, that does seem a rather low value - extrapolating from the annuity rates given at FT at your current age would suggest an income of closer to £1,050.

Have I missed something vital in this ?

The ability to withdraw the 25% PCLS?

Drawdown (to be used as income, not to simply take the money out of the fund as you suggest.)

Presuming you should live off solely any gains the fund makes, instead of considering a mixture of gains+capital (which is simplistically what an annuity is under the covers.)

kidmugsy

Grouchy wrote: »

I have a common law OH

In case of doubt: a common law marriage is a concept present in, for example, the law of some US states; it is not part of the law of England and Wales.

jamesd

Grouchy wrote: »

I am 60 retired, no income except interest from savings. I have to decide on various options with pension pots. One has a current value of £21k and at present is calculated to give an annual income of £500 taxable from when I reach retirement age. (I understand this is variable and can change over time).

That's weird. That income level is only 2.4% of the current pension pot size. It's almost as though the income is calculated assuming that you'll be a fool and buy an inflation-linked annuity when you can get more than twice as much, 5.8% inflation-linked, by deferring your state pension instead.

Grouchy wrote: »

So, does this mean (assuming the value of the pension and the annual payout remains rougly the same for argument sake) that I would have to live 40 years past retirement age to receive back my contributions to the pension?

It probably just means that you asked a company that wants to sell you an annuity and keep much of your potential income for itself. No need to be a mug and play along with them.

Grouchy wrote: »

If I cash in this pension pot and put the £21k into an account with say at current interest rate 1.5% then that would give me approx £300 interest per year taxable. And so: I would get a small(er) income earlier and b) I would have the £21k on hand if needed.

The pension projection is after allowing for inflation. The 1.5% is before allowing for inflation, so it's too high. But the big deal is what I've already written about buying an annuity. That's what makes the money in the pension look like such a bad deal and the alternatives look so good.

Grouchy wrote: »

I have a common law OH and all finances are in one pot so to speak in both names.

Just in case you don't know, common law OH gets no protection at all besides what you've got by putting things into both names. It's a high risk area. But at least you have done something so you probably know this already.

Grouchy wrote: »

Have I missed something vital in this ?

Mainly the assumption that you'll be daft and buy an annuity instead of deferring our state pension.

However, thee are other things that you can do that can make you money:

1. You can pay 2880 net into a pension and get it grossed up to 3600 then take it all out again whenever convenient, gaining the tax relief. The Virgin pension is a good one to use for this because it has no direct charges. This is a particularly great deal if you're not a tax payer and get out all of the money tax free. You can do this every year until you reach 75.

2. P2P. It's easy to get 12% interest rate from P2P. Some investment risk but it's a good deal and you have investment risk already. You might look into say Ablrate and MoneyThing, both of which habitually expect to pay around 12% and do secured lending, Ablrate mainly on planes and big business things, MoneyThing mainly on pawned items (and it takes the first loss, if any, not you). These returns are higher than typical stock market gains so it could pay to take money out of the pension now to reinvest in P2P. Some of this income is tax free from next year even if you're a tax payer, and from next year also you will probably be able to do it tax free within an Alternative Finance ISA, a new type of ISA being introduced from 6 April 2016.

3. If you're a tax payer you might consider some suitable use of VCT investing. These get you 30% income tax relief on the purchase price, capped at the income tax paid in the year. You have to hold or five years or repay it. they typically pay around 7-9% tax free dividends (for all tax rates) but up to 11% is available from one I've mentioned, just do a search. So far I've mainly mentioned ones secured at least partly on really property so they are not the high risk end of VCTs.

Using a combination of options you should be able to both get higher growth/income and lower tax bill, without increasing overall investment risk compared to a typical equity/bond investment mixture with no capital protection except for fraud, which is what you have now in a pension. The P2P and VCTs I'm thinking of have security to provide at least substantial capital value protection but the P2P lacks the FSCS fraud protection.

Once you get to state pension age you can then consider deferring your state pension for a while to get that 5.8% plus inflation for life secure income, funding this out of income and capital from your investments.

Use a bit of caution about P2P advice. While it is now possible for advisers to give regulated advice about P2P if they ask for it to be added to their existing permissions, few will know enough about the subject to give well informed advice. Most likely they will think it's all high risk equity investing with no security at all, or lending to consumers and small businesses without security, when secured lending instead is readily available and often pays more than the unsecured options.

Grouchy

Thanks for the replies and helpful pointers. I did cut a lot out of my situation on my OP and used some shorthand, but was just trying to make things brief.

I see now that that more info/clarification is required. I don't understand some of the lingo used or some of the concepts so will do some research on those. In the meantime I have some observations which applies to one or more replies.

I had no idea that the projected annual income from the pension may be inaccurate and so wildly inaccurate if what you say is true, possibly 50% more! As an average Joe it is quite deceptive if their estimation is much lower than reality and all I have to go on is what is on their recent statement. Is there are way to verifiy that their projection is significantly lower than suggestion by Paul of £1050 (I know this isn't written in stone btw). Is there a table or official source one can use (as I have other pensions of this sort to be decided on too which I also have value and annual income statements for)?

I also understand that the Pension contributions were shared between my employer and myself - just using a bit of shorthand for brevity. Sorry for confusion.

The common law thing, what I actually meant more accurately is living together, no official ceremony. I understand a bit how this works Paul and that is why we have almost everything in joint names.

Nevertheless, if it is indeed more like a£1000 per year, that is still 20 odd years to get back what has been put in, so until I am 85 (if I live that long). I understand also that the value could increase over time (also fall), so taking it on current info.

The tax implications I understand are important though I don't understand fully about some things mentions, so will ponder those.

I am not currently paying tax due to income being within the tax free allowance. I could draw down this pot over 2 or 3 years (if this is allowed by the pension co, I would have to check) and therefore avoid paying tax on it if arranged properly. This would also work well taxwise, as when I turn 65 I will have the full state pension, other local government type pensions which are much more substantial than this one, and significant savings from which I will have interest and therefore I would imagine I will have a small portion of money which is taxable. If at decision-time at 65 for this pension I decided (for whatever reason) to cash it in then, it will be fully taxable as I would have a reasonable income from other sources that would bring me over the tax free theshhold.

I do keep coming back to, what is wrong with cashing it in and say putting the £21k in a 3% 5 year bond (I used the 1.5% before as an easy example but I'm aware that there are other higher rate options if I don't need the money on hand, which I don't) so £600 per year interest. Almost certainly, for the next five years the income from this will fall within my Tax Free allowance. From 65, this may be taxable or not, depending on other income streams. Is this a rational way of looking at it?

jamesd - thank you for your input and time taken to explain options, I understand some of it, but not all, so will have to think through some of the things you mention. But there are points for clarification:

I have not asked any company about what I should do. The 'living 40 years to get back what has put in' was just a simple way for me to state things very baldly so I can get my head around in a simplified way of talking. Thanks for the heads up on companies looking out for their own interests rather than mine, it is a good thing to keep remembering.

Your suggestions on how to make more money from things is interesting, I will have to think on those things as I am very cautious with savings/investments, and risk shy, but useful to have them to look into. Thanks.

Sorry this is much longer and involved than intended, and I have tried to address your replies as well as I can.

Thanks for your input it is appreciated.

dunstonh

I had no idea that the projected annual income from the pension may be inaccurate and so wildly inaccurate if what you say is true, possibly 50% more!

The figure uses worst case assumptions on a low projection rate. The idea being that instead of getting to retirement and finding out they over estimated and you get less (which used to happen), they now underestimate as its better to come in with more.

As an average Joe it is quite deceptive if their estimation is much lower than reality and all I have to go on is what is on their recent statement.

They are just a bunch of assumptions thrown together to get that figure. Those assumptions may or may not reflect what actually happens. They are theoretical possibilities but in near infinite range of possibilities, the chance of that figure being correct (or any other figure you put on it) is billions to one. They have to put something down and its better to err on the side of caution.

Is there are way to verifiy that their projection is significantly lower than suggestion by Paul of £1050 (I know this isn't written in stone btw).

The assumptions are shown on the statement. Your financial adviser will also be able to verify it. I can verity it and others here have.

I do keep coming back to, what is wrong with cashing it in and say putting the £21k in a 3% 5 year bond (I used the 1.5% before as an easy example but I'm aware that there are other higher rate options if I don't need the money on hand, which I don't) so £600 per year interest. Almost certainly, for the next five years the income from this will fall within my Tax Free allowance. From 65, this may be taxable or not, depending on other income streams. Is this a rational way of looking at it?

Cash savings are a high risk option when it comes to income provision. Whilst investments suffer investment risk and could suffer shortfall risk or inflation risk, cash savings WILL suffer inflation risk and at some point likely suffer shortfall risk.

Even in the most bog standard managed fund and going through one of the worst periods of investing, most balanced managed funds have averaged over 5% after charges. So, what is the attraction of taking on guaranteed risks to earn less?

bowlhead99

jamesd wrote: »

3. If you're a tax payer you might consider some suitable use of VCT investing. These get you 30% income tax relief on the purchase price, capped at the income tax paid in the year. You have to hold or five years or repay it. they typically pay around 7-9% tax free dividends (for all tax rates) but up to 11% is available from one I've mentioned, just do a search. So far I've mainly mentioned ones secured at least partly on really property so they are not the high risk end of VCTs.

The P2P and VCTs I'm thinking of have security to provide at least substantial capital value protection

@Jamesd...
Without wanting to derail the OP's thread too much - you post a lot about VCTs and how you can get secured bond-like returns with the help of the income tax deduction available on your purchase price.

If you haven't checked out in much detail the latest proposed rules (which will go into place, subject to receipt of state aid clearance, with effect from royal assent to the Summer Finance Act) it is perhaps worth you doing so. The qualifying criteria limits relief to certain types of companies within x years of their first commercial sale, caps on total investment a company may receive under VCT and EIS regimes, new rules preventing EIS and VCT funds being used to acquire existing businesses etc.

As the government negotiates in relation to the state aid rules it has had to come up with some changes. Ultimately if you are not actually investing in risk capital then the intention is not to give you or the company concerned a free ride in terms of the government financing your investment for you.

This is OT for the OP's thread above who is probably not looking at VCT investing with his low value pension pot, but as I've seen you pimp the virtues of VCT investing all over the place in recent weeks, I figured I should throw the comment out there at some point.

jamesd

Thanks for mentioning that. It'll be the weekend before I do what I usually do and read almost all of the Budget details. Looks as though it's been decided that management buy-out funding for existing businesses isn't really a particularly risky activity that servers the purpose of these schemes by helping new companies. Can't say that I disagree with that.

Existing VCTs can keep their existing investments. The one I've mentioned most has lots of investments in it that stopped being allowed for new VCTs some years back. Its biggest holding is a hotel and those haven't been allowed for years as new VCT investments. Its most recent substantial investment was in a new school, secured on the building.

Given that Grouchy is not currently an income tax payer the initial VCT income tax relief wouldn't be available, just the ongoing income. Probably not worth going for since P2P can pay more while not a tax payer. Might be of interest once income from the other pensions is higher, maybe.

bigadaj

bowlhead99 wrote: »

@Jamesd...
Without wanting to derail the OP's thread too much - you post a lot about VCTs and how you can get secured bond-like returns with the help of the income tax deduction available on your purchase price.

If you haven't checked out in much detail the latest proposed rules (which will go into place, subject to receipt of state aid clearance, with effect from royal assent to the Summer Finance Act) it is perhaps worth you doing so. The qualifying criteria limits relief to certain types of companies within x years of their first commercial sale, caps on total investment a company may receive under VCT and EIS regimes, new rules preventing EIS and VCT funds being used to acquire existing businesses etc.

As the government negotiates in relation to the state aid rules it has had to come up with some changes. Ultimately if you are not actually investing in risk capital then the intention is not to give you or the company concerned a free ride in terms of the government financing your investment for you.

This is OT for the OP's thread above who is probably not looking at VCT investing with his low value pension pot, but as I've seen you pimp the virtues of VCT investing all over the place in recent weeks, I figured I should throw the comment out there at some point.

Thats all totally valid and appropriate. However Jamesd thinks he's identified a Mis match in terms of risk and return on particular vct investments. This is what many people would consider to be an ideal scenario, it's not the intent of the government to offer this, but if it exists then it should be attractive for those people who can accommodate what is still a reasonable degree of risk. The tax relief and benefits aren't risk free, the idea that soemthing is asset backed is by no means a guarantee, the value and liquidity of properties for example is always up for debate and subject to the vagaries of any market that may or may not exist.

Ultimately what some may consider to be a low risk vct is still a very high risk investment for most people, so as we always say dyor and caveat emptor etc

TH1878

bigadaj wrote: »

Ultimately what some may consider to be a low risk vct is still a very high risk investment for most people, so as we always say dyor and caveat emptor etc

Amen. VCTs or P2P are not low risk for people who are not knowledgeable about financial services.

They have their place but to 'market' them for a saver with £21k is crazy.