Pension now/pension later??

jamesd

littlebigjon wrote: »

My wife is wondering whether to take a modest pension from Sun Life by buying an annuity when she turns 60 in November, or continue paying the same premium for another 5 years and then buying an annuity which would hopefully pay out more at that time.
She doesn't need the money at the moment ... At present her pot is £15k and a guaranteed annuity will pay £1113 per annum from November.

First thing to know is that guarantee annuity rates are typically far higher than current open market annuity rates so they can be a good or great deal compared to a normal annuity purchase.

One thing you should always compare annuity rates to is deferring the state pension. If the rate is 7.42% inflation-linked it's better because the state pension increase for deferring is 5.8% per year of deferral, inflation linked. If it isn't inflation linked it's harder to say which will turn out to be best, probably state pension long term. Whether there are death benefits for a spouse also matters.

You can ignore talk of brexit effects on annuity rates for this annuity, the GAR will not be affected at all by that. Open market deals will be.

It's hard to know whether she will be better or worse off at 60 because part of the answer depends on investment returns between then and now. The guaranteed annuity rate may also change with age or may have an age when it expires and is no longer available.

She should continue to make payments into a pension because she can gain from the tax relief whether she's working or not.

littlebigjon wrote: »

Perhaps she would be better transferring the Sun Life £15k into that?

NO! The guaranteed annuity rate only applies while the money is with Sun Life, it's lost the moment the money is transferred. It's quite likely that the best option is to use 100% of the Sun Life pot to take the guaranteed annuity rate.

The Virgin pension is quite expensive, even compared to normally considered expensive places like Hargreaves Lansdown. If she's interested she can get comparable FTSE index trackers for half the price or less including platform costs, compared to what Virgin charges for theirs. Where Virgin shines is for people who want to pay in money than take it out quickly, for which they have no charges.

littlebigjon wrote: »

She also has a Virgin pension with £75k in at present that she will definitely continue paying £300/month into until 65.

Why only £300 a month? She could always take some tax free lump sum from this pension and use it to fund higher payments, getting more tax relief on the money. Limit the tax free lump sum taken to no more than £7,500 (so that plus three times as much transferred and moved into drawdown at most) and there's no issue with lump sum recycling rules. She could take say 1000 tax free lump sum and £3,000 taxable as a UFPLS lump sum payment. That particular method limits her future pension contributions to £10,000 a year, probably not a problem.

kidmugsy

jamesd wrote: »

One thing you should always compare annuity rates to is deferring the state pension. If the rate is 7.42% inflation-linked it's better because the state pension increase for deferring is 5.8% per year of deferral, inflation linked.

The headline 5.8% figure rather overstates the attractions of deferral because it neglects the effect of receiving the pension for one year less. On the other hand, the fact that it's index-linked is a big deal because the year of pension forgone will just have its contemporary cash value; the Extra Pension received will be index-linked until death. It will be insurance against, for instance, one big burst of inflation over the succeeding 25 or so years.

A mixture of GAR level annuity, plus some index-linked annuity-equivalent earned by deferral, might be an attractive diversification.

Annuities, or the annuity-equivalent of Extra Pension by deferral, are not just longevity insurance but also dementia insurance in the sense that they need minimal management when one is in one's muddled years, and they are harder to steal than capital.

jamesd

kidmugsy wrote: »

The headline 5.8% figure rather overstates the attractions of deferral because it neglects the effect of receiving the pension for one year less.

For the first year it's actually a better gain than that because the money isn't all spent at the start of the year. The gain gradually decreases over time unless the money is making 5.8% plus inflation while it's waiting use for spending during deferral.

kidmugsy wrote: »

Annuities, or the annuity-equivalent of Extra Pension by deferral, are not just longevity insurance but also dementia insurance in the sense that they need minimal management when one is in one's muddled years, and they are harder to steal than capital.

True, though fortunately most of us won't end up suffering from dementia. It's still something to think about in planning and since conventional annuities start to become good alue after something like age 80-85 they can become a useful purchase, even more so if ill health is involved.