Purchasing annuity with proceeds of property sale

Golactico

We will be getting some detailed financial advice in due course, but can anyone help with some general guidance?

My 77 year old mum has never paid into a pension and although she has always done a bit of work to supplement her state pension, she now wishes to stop work altogether. She owns a property worth approx £130K and the plan is to sell this, rent a retirement flat and use the sale funds to buy an annuity which, added to her state pension, should see her financially comfortable for the rest of her life. My question is, by putting the sale proceeds directly into a pension vehicle, will she get any tax relief on the money that she gets from her property sale? Most people contribute to a pension fund over many years, benefitting from tax relief as they do so. My Mum has never been in a position to contribute to a pension over her working years, so it would seem to me a bit tough if she misses out on any government funded uplift to here pension pot, just because her life circumstances mean that the only way she can create a pension pot is by effectively making a one off lump sum pension contribution, immediately prior to purchasing an annuity.

Any clarification on this greatly appreciated.

Malthusian

As she's over 75 she can't get tax relief on pension contributions. So it makes no sense for her to pay into a pension.

From the Government's point of view, the incentives to save into a pension are designed to encourage those who are currently working to lock their money away for what could be decades - not to give free money to those who are already eligible to draw their pensions. (There are circumstances in which you can take advantage of the tax rules, but unfortunately not in your Mum's case.)

She can still do what you are describing by buying a purchase life annuity, she just won't get tax relief. (The income from a purchase life annuity is partly tax free, as part of it is considered the return of your own money, and partly taxable as income.) Whether this is a good idea or not will depend on her circumstances and how much she worries about running out of money.

bigadaj

Have you looked at equity release?

It may be that the flat would suit better but many older people really don't want to move, and at her age it might provide reasonable value to provide income.

kidmugsy

It may be that at age 77 the government's Pension Top-up would be decent value for part of her money, whether from sale of the property or from equity release.

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

jamesd

She is prohibited by law from putting any useful amount of money into a pension because the annual pension contribution limit for a person with no relevant income - meaning mostly earned income - is £3,600 gross a year. She will probably find that most firms will refuse to even let her open a pension.

For a person with relevant income the limit is their relevant income, normally meaning their employment income, for the tax year in which they make the pension contribution. In addition there is a cap of £40,000 a year.

This does not mean that she is unable to buy an annuity if she wants to do that. There are several types of annuity that are available using non-pension money:

1. Term annuity. Pays out for a set time, likely to pay out in total less than was paid to buy it, or maybe a little more, depending on how much money is being spent. Might spend say £100,000 to get £20,000 of income for five years. Likely to be easy to beat with savings accounts.

2. Purchased life annuity. These pay out for life and the payments depend on the health and hence life expectancy of the buyer. The market has very few firms and rates tend to be very uncompetitive. It's highly likely that unless her health is poor deferring her state pension will be a better deal.

3. Immediate needs annuity. These pay out for life and are aimed at those who are forced by ill health to enter care homes. Typical life expectancy in such cases is in the two or three years range. The benefit is that if the person lives longer than reasonably expected their estate does not drop in value, but of course if they are spending all of their capital this doesn't matter and they just benefit from the protected income for life. While expensive these can be a good option.

For all three of those much of the money is a return of capital and that portion is not taxable income.

However, unless her health is suffering, she's still too young to be a good candidate for a purchased life annuity and if her health is OK she's not suitable for an immediate needs annuity either. Normal annuities don't really start to compete well for those in normal good health for their age until at least age 80-85, at which point the death rate is getting high enough that the loses by those who die early are providing a significant subsidy to the ones who live longer.

Assuming that her health is good, her best initial option for at least some of the money appears to be replacing her state pension income while she defers it. This can be started once even after a person has claimed it. The increase for a person who reached state pension age before 6 April 2016 is 10.4% a year. This is inflation-protected money, increasing with CPI.

Deferring pays more than buying the state pension top-up until about age 83. However, she has enough money to do both the maximum state pension top-up purchase and defer for perhaps five years to provide her guaranteed income. Again, this is assuming that her health is good.

Beyond those two state pension things what to do depends on her best annuity quotes taking into consideration her health, compared to the available investment options, with P2P lending providing perhaps 8-10% after possible bad debt on say 12% raw interest rate, though some options provide protection funds that can reduce bad debt potential in exchange for lower returns of about 6% or so. Unlike the state pension and annuity choices this does not involve spending the money at the start, though she certainly could choose to gradually spend it if she wished.

Really critical to her decision is her health and hence life expectancy. The best choices can be radically different depending on that.

kidmugsy

Two other things: (i) if you are tempted to increase her state pension by deferral and top-up, it would be wise to check that her increased pension doesn't exceed the Personal Allowance vs income tax (currently £11k p.a.), (ii) you would be wise to check on possible interaction with state "benefits".

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

Alter_ego

kidmugsy wrote: »

It may be that at age 77 the government's Pension Top-up would be decent value for part of her money, whether from sale of the property or from equity release.

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

Just done a quick check - she would need to live another 12 yrs approx to get her money back.

xylophone

Just done a quick check - she would need to live another 12 yrs approx to get her money back.

Stock up on the eggs and steak and she'll be quids in.....:D


http://time.com/4337417/new-oldest-person/

kidmugsy

Alter_ego wrote: »

Just done a quick check - she would need to live another 12 yrs approx to get her money back.

What did you assume about inflation?

jamesd

Alter_ego wrote: »

Just done a quick check - she would need to live another 12 yrs approx to get her money back.

That isn't the objective here, though, the initial objective assumption is secure income for life even if the life turns out to be long. That is, it's at least as much about the long life insurance value as the break even point.

Currently state pension deferral is competing with annuity purchase and if in good health she can benefit from deferring for five to perhaps ten years before annuity rates can match the 10.4% inflation-protected increase she can get from deferring.

Similar for the top-up purchase, it's a better deal then the annuity option initially being considered if her health is good.

Assuming good health it's likely that both the top-up and state pension deferral for five to ten years will be her best initial uses for the money given a secure income for life objective. Given this objective it doesn't matter that she may die while deferring because it would still have been a better deal than the annuity purchase. Subject to health. And of course the deferral money is paid out as a lump sum in case of death while deferring.

Meanwhile the rest of the money can be invested and if her health gets worse she can later buy an annuity or more, perhaps gradually spending some on this each year.

Golactico

Genuine thanks to everyone who has responded. I find it amazing that people are good enough to go to such time and effort to offer their opinions and advice. The important thing that I’ve learned from your replies is that the solution to securing my Mum’s financial future is nowhere near as simplistic as I suggested in my original post! At least now, when we speak to an IFA, it will be a far better informed discussion. Many thanks again.