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Is this good advice?
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stevet2607
Posts: 16 Forumite
I'm 61, my wife is 60 and we have retired. After taking my 25% tax free from my pension pot it leaves £150,000. We have other collectives and cash totalling £400,000. We want to expend the portfolio by taking £35,000 pa until we are 85. We realise the years between now and state pension age are going to be expensive until state pension kicks in. Our new financial adviser initially looked at this and advised that the £35k was achievable with our attitude to risk as balanced. He said that we should only have 5% of our money in cash and the rest in Equities, bonds, etc.
However now he has produced his report he is suggesting that to protect our portfolio from the market I buy a protected retirement plan for £53,000 from my pension pot giving an income of £11,000pa (personal tax allowance) for 5 years, and my wife buys a Purchased life annuity from our savings for £66,750 also giving a £11,000 income for 6 years. This would give £22,000pa so he suggests the balance of £13,000pa be found from our cash. When we reach state pension age we would review. He says this option means we don't have to worry about the volatility of the stock market for the next 5 years.
This raises lots of questions:
1 We are keeping much more than 5% as cash. We would need to hold back 5 years of £13,000pa which is another £65,000.
2 In one instance we are spending £66750 to get back £66000. That's £750 less! Surely just keeping in the bank would be better?
3 By converting our cash into income we have used the maximum personal allowance. Surely keeping it as savings, the small amount of interest would be significantly below the personal allowance. Although we don't intend to work again its nice to keep the option open.
4 The products commits nearly £120,000 for 5/6 years and only gives us back what we have bought.
Can anyone suggest either a better product to give us the £35k, or alternative put up a case to keep everything in the market and take the £35k pa straight from there. A straight line at 4% growth gets me to 85 years of age.
However now he has produced his report he is suggesting that to protect our portfolio from the market I buy a protected retirement plan for £53,000 from my pension pot giving an income of £11,000pa (personal tax allowance) for 5 years, and my wife buys a Purchased life annuity from our savings for £66,750 also giving a £11,000 income for 6 years. This would give £22,000pa so he suggests the balance of £13,000pa be found from our cash. When we reach state pension age we would review. He says this option means we don't have to worry about the volatility of the stock market for the next 5 years.
This raises lots of questions:
1 We are keeping much more than 5% as cash. We would need to hold back 5 years of £13,000pa which is another £65,000.
2 In one instance we are spending £66750 to get back £66000. That's £750 less! Surely just keeping in the bank would be better?
3 By converting our cash into income we have used the maximum personal allowance. Surely keeping it as savings, the small amount of interest would be significantly below the personal allowance. Although we don't intend to work again its nice to keep the option open.
4 The products commits nearly £120,000 for 5/6 years and only gives us back what we have bought.
Can anyone suggest either a better product to give us the £35k, or alternative put up a case to keep everything in the market and take the £35k pa straight from there. A straight line at 4% growth gets me to 85 years of age.
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Comments
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I think it would be reasonable not to have too much in cash if you are looking at drawdown options, because you do still probably have ~25 years of investing (and inflation risk) ahead of you.
Although any outcome will largely depend on how risky everything else you hold is, of course.
The annuity options do sound strange to me, although in this world of low interest rates a short-term annuity (actually I wouldn't call it that, but I'll use the term you have) shouldn't be expected to do much for you, as the providing company won't get any return themselves.
But I wonder - is there a component here you have missed, such as inflation indexation or something? You should just ask the IFA point blank the point you made here about getting back just what you put in, and see what they say.
Up to a certain amount, you may well be able to do better managing cash returns than buying an annuity.0 -
These are questions you should be putting to the adviser. It is difficult for us to comment without knowing the details. However, it is extremely common to go for an annuity/drawdown mix. Check the terms of the annuity as it looks like you are missing something out.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0
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If you go for high interest current accounts and regular savers you'll get about 4% p.a., or a little less, on somewhere about £100k. If you also go for a mix of equities and preferred shares, you might get another 4% p.a. of dividends, so there's another £12k p.a. Those sum to £16k. You'd then want to find another £20k or so, to realise by sales of shares. Or you could choose to draw down some of the pension tax-free by balancing the other income between you carefully.Free the dunston one next time too.0
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how much in state pensions will you get in 5/6 years' time? because, for instance, if it's £15k, then you will need to generate an additional £20k in other income from that point.
the plan seems to involve using c. £185k to cover the next 5 years, which leaves c. £365k left over. what is the plan for the latter capital? i'd have thought it should be invested in a mixture of equities, bonds, etc, with the income reinvested for the next 5 years, after which you'd need to start drawing income of (say) £20k a year from it.
i do think the broad idea of using cash, or cash-like things, to cover the next 5 years, and investments for after that, is a reasonable idea.
however, i don't get the bit where you're "spending £66750 to get back £66000" - perhaps there is missing info there (or is that to allow for tax? a purchased life annuity will be only partly taxable, because some of it is regarded as repayment of capital).
as kidmugsy says, you could use high-interest current accounts for some of the cash part.
in terms of tax, i don't know quite what's going on. how much of the £400k (that isn't in the pension) is in ISAs, or other tax shelters? you could be moving £30k a year into ISAs between you. though if this capital is divided between you suitably, you may be paying little if any tax on income/gains from it anyway. but the expected tax position should be something your advisor can explain.0 -
When your state pension starts you could, if you've juggled your assets well, receive an annual (say) £8k in state pension, £3k in pension drawdown, £1k in interest and £5k in dividends without paying any tax. Or you could have the balance towards more interest and less dividends if that lets you sleep better. Add on what your wife will receive, plus income from ISAs, and £35k p.a. between you is a doddle.
To get more out of the pension without paying tax on it, draw it soon, before you receive your state pension. Meantime, contribute to a personal pension of some sort for your wife so that she too can draw down a little pension income tax-free. By all means contribute to a pension for yourself too, if you want. Basically, fill your tax shelters while they still exist on such absurdly generous terms.Free the dunston one next time too.0 -
stevet2607 wrote: »my wife buys a Purchased life annuity from our savings for £66,750 also giving a £11,000 income for 6 years.stevet2607 wrote: »I buy a protected retirement plan for £53,000 from my pension pot giving an income of £11,000pa (personal tax allowance) for 5 years
Year 1: Draw 11,000 in monthly payments and get interest of 3% on £49,000 plus 3% on half of the £11,000 (a general approximation that works reasonably for regular payments). End of year you have £49,000 + £1,470 + £330 = £50,800. I'm assuming that this is going to be within your allowances so tax free.
Year 2: Similar to year 1, end of year you have (£50,800 - £11,000 = £39,800) + £1,194 + £330 = £41,324.
Year 3: end of year you have (£41,324 - £11,000 = £30,324) + £909.72 + £330 = £31,563.72.
Year 4: end of year you have (£31,563.72 - £11,000 = £20,563.72) + £616.89 + £330 = £21,510.61.
Year 5: the IFA plan leaves you with nothing at the end of this year, the Santander plan leaves you with £10,510.61 plus the interest for the year.
Again the IFA appears to be mathematically challenged, recommending a risk free solution that appears to leave you worse off.
With two recommendations that do not appear to make sense I do not think that it is wise to do business with this adviser. It appears that the advisor may be looking to sell you "products" rather than solutions.0 -
grey_gym_sock wrote: »however, i don't get the bit where you're "spending £66750 to get back £66000" - perhaps there is missing info there (or is that to allow for tax? a purchased life annuity will be only partly taxable, because some of it is regarded as repayment of capital).0
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One thing to be aware of is that the highest risk for income drawdown is a sustained market drop that happens during the early years. It is not fundamentally wrong to suggest using cash or cash-like options to protect against the need to draw money from investments at a time when they may have a low value. But no need to buy a product to do it when normal current and savings accounts can do the job more cheaply.
To generate some more income you might consider putting 10% of the total of £550,000 into peer to peer investments paying around 12% with a split between the platforms Ablrate, MoneyThing and SavingStream, spreading it over many loans at each place. Ignoring potential defaults - all three have protection against losses of various sorts like security being taken - and assuming that you just get the commonly available 12% that £55,000 could produce £6,600 a year of income, taxable if outside an ISA.
Natural dividends and yield from equity funds and bonds in conventional investments in income units could provide the remainder of the income need and leave no need to draw on capital during a possible market downturn.
Assuming you're each in normal good health it is likely to be a good idea to defer your state pensions for at least five years, increasing it by 5.8% not compounded for each year of deferral. The extra income is inflation-linked to CPI, not triple lock. This provides ongoing secure lifetime income at a far lower cost than a standard inflation-linked annuity. You should check your state pension forecasts but at £8,000 base each the increase would cost £40,000 each and buy £2,320 of inflation linked income each. I've ignored the interest/investment gains/losses on the £40,000 during the years you're drawing on it.
If health remains good at that point further deferral could be considered.
For more general retirement planning you might find it useful to take a look at my posts in these two threads that explain one way of working out sustainable withdrawal rates:
Early retirement @ 55 what to do with £ 380000
How to best use my flat to retire and help family member
Don't use age 85, normal life expectancy is likely to be around age 90 and you need a safety margin so age 95 is more sensible. Pay particular attention to the minimum income requirement and don't set it a lot higher than your actual minimum income requirement. The cases that aren't worst will normally mean that you can take a lot more unless you do get unlucky.
I suggest that you don't use the very high levels of cash involved in the savings approach. Even three years of planned income topped up with natural dividends and yield from bonds in income form will last a good while and deliver the need without so much loss of investment growth potential. You might reasonably expect the whole £550,000 to deliver around 2.5% in that combination, so around £13,750 less whatever you do hold in cash and P2P. So maybe three years of desired investment income in cash.
Beyond that, my personal view is to observe that many stock markets are at above their historic cyclically adjusted price/earnings ratio, a sign that future returns are likely to be lower than average. I also note that we're now seven years into a bull market, making it one of the longest ones there has been. This causes me to think that now is not the time to have high percentages of investments in equity funds or shares and instead to favour alternative options that are not so exposed to the stock markets for those who have a high exposure to "sequence of returns" risk - that risk incurred by a big and sustained drop just after retirement. I'm dealing with this using a relatively high peer to peer allocation, way higher than most people would want but you don't have to do that, just consider whether now is really a good time to have a high share allocation and what you might prefer for some of it. While the cyclically adjusted P/E relationship to returns returns got someone a Nobel Prize equivalent in economics it's still not guaranteed to happen.0 -
Many thanks for all the replies, especially the details supplied by jamesd. I want aware that the income from the annuity wasn't subject to tax, although I had realised that a high interest current account such as Santander would be a better option. My IFA is obviously concerned that markets could fall soon, but I have not yet discussed his detailed plans. I would be very happy to see 2.5% in the short term. You have given me enough information to confidently go back to the IFA with questions.0
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stevet2607 wrote: »Many thanks for all the replies, especially the details supplied by jamesd. I want aware that the income from the annuity wasn't subject to tax, although I had realised that a high interest current account such as Santander would be a better option. My IFA is obviously concerned that markets could fall soon, but I have not yet discussed his detailed plans. I would be very happy to see 2.5% in the short term. You have given me enough information to confidently go back to the IFA with questions.
It doesn't really matter that it's not taxed, it's still more expensive than putting the cash under a matress and taking your income out of that, there'd still be no tax to pay.0
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