Advice on level pension v. income drawdown, please

Sapphire

If a pension has matured (person's age being 65) with a pot of around £115,000, would it be best to take a level pension or income drawdown? Level pension suggested by financial adviser is around £6,100 p.a., but he is pressing for income drawdown. The person involved is risk averse and inclined to take a level pension option, especially given global uncertainty in markets.

Any advice would be appreciated.

dunstonh

would it be best to take a level pension or income drawdown?

Depends on the individual in terms of their objectives, knowledge, understanding, risk profile, behaviour and capacity for loss.

Level pension suggested by financial adviser is around £6,100 p.a., but he is pressing for income drawdown. The person involved is risk averse and inclined to take a level pension option, especially given global uncertainty in markets.

If they dont like the risk of drawdown then they should go with the annuity. Nothing wrong with either option. Both have pros and cons but both can do the job.

Sapphire

dunstonh wrote: »

Depends on the individual in terms of their objectives, knowledge, understanding, risk profile, behaviour and capacity for loss.

If they dont like the risk of drawdown then they should go with the annuity. Nothing wrong with either option. Both have pros and cons but both can do the job.

Thanks very much for the advice. In your opinion, is the amount quoted for the annuity about right, or could a better deal be obtained?

bigadaj

Sapphire wrote: »

Thanks very much for the advice. In your opinion, is the amount quoted for the annuity about right, or could a better deal be obtained?

If the person is risk averse than an annuity provides certainty.

However the pension is only a pot of money, the annuity offered by the company holding the pension isn't necessarily the best option, on that size of fund then an ifa may be able to get a better deal. Also issues like health can improve the amount offered.

maximumgardener

as others have said the annuity is for the risk averse

it gives certainty of payment for the rest of their life.......many people actually do prefer that

there are also options to do part drawdown and PART ANNUITY which may be worth a look?

kidmugsy

Sapphire wrote: »

If a pension has matured (person's age being 65) with a pot of around £115,000, would it be best to take a level pension or income drawdown? Level pension suggested by financial adviser is around £6,100 p.a.

First things first, take the tax-free lump sum. Then debate what to do with the taxable bit.

Sapphire

Thanks to everyone for their advice.

kidmugsy: not too sure what would be done with a tax-free lump sum, and taking it would reduce the payment from the annuity, wouldn't it?

bigadaj: the annuity is being offered via an IFA.

jamesd

Sapphire wrote: »

Thanks very much for the advice. In your opinion, is the amount quoted for the annuity about right, or could a better deal be obtained?

Yes, a better deal could be obtained. The level pension, meaning not increasing with inflation, is 5.30%. Deferring the state pension produces an increase of 5.8% per year of deferral, pro-rated for parts of a year, and this 5.8% is inflation-linked to CPI. It's a massively better deal than the one he has been quoted. IFAs and other annuity sales places are not currently required to even mention that state pension deferral exists, let alone that it usually pays more.

So first thing to do is get a state pension statement for both of you and work out what deferring for five to ten years would cost. Deduct that from the amount you're considering spending on the annuity.

Taking the tax free lump sum would reduce the amount available to purchase an annuity. It's still the right thing to do because it can stay tax free, say if invested in an ISA or perhaps using P2P.

It's likely that state pension deferral will use most of the available money, eliminating much need to consider spending money on a lower-paying annuity. Instead, drawdown could be used until say age 80-85 or until health is poorer, reducing life expectancy, both things that can make annuities a better deal than state pension deferral.

You can find a good range of resources for drawdown planning in this topic, which also covers state pension deferral and the benefit of continuing to make pension contributions until age 75.

If your IFA didn't mention state pension deferral you might also want to make a formal complaint that they failed to mention the highest paying guaranteed income option for the money. Don't expect anything much to happen as a result, it's not likely to be considered by them to be mis-selling even though it would have made you both substantially poorer in retirement.

Sapphire

jamesd wrote: »

Yes, a better deal could be obtained. The level pension, meaning not increasing with inflation, is 5.30%. Deferring the state pension produces an increase of 5.8% per year of deferral, pro-rated for parts of a year, and this 5.8% is inflation-linked to CPI. It's a massively better deal than the one he has been quoted. IFAs and other annuity sales places are not currently required to even mention that state pension deferral exists, let alone that it usually pays more.

So first thing to do is get a state pension statement for both of you and work out what deferring for five to ten years would cost. Deduct that from the amount you're considering spending on the annuity.

Taking the tax free lump sum would reduce the amount available to purchase an annuity. It's still the right thing to do because it can stay tax free, say if invested in an ISA or perhaps using P2P.

It's likely that state pension deferral will use most of the available money, eliminating much need to consider spending money on a lower-paying annuity. Instead, drawdown could be used until say age 80-85 or until health is poorer, reducing life expectancy, both things that can make annuities a better deal than state pension deferral.

You can find a good range of resources for drawdown planning in this topic, which also covers state pension deferral and the benefit of continuing to make pension contributions until age 75.

If your IFA didn't mention state pension deferral you might also want to make a formal complaint that they failed to mention the highest paying guaranteed income option for the money. Don't expect anything much to happen as a result, it's not likely to be considered by them to be mis-selling even though it would have made you both substantially poorer in retirement.

This isn't to do with a state pension, which has already been taken by the person concerned, after deferral for a couple of years.

With the particular pension mentioned here, though, it is certainly worth considering taking part of the money as tax-free cash, and then perhaps reinvesting it…

Many thanks for the info.

LXdaddy

Sapphire wrote: »

This isn't to do with a state pension, which has already been taken by the person concerned, after deferral for a couple of years.

With the particular pension mentioned here, though, it is certainly worth considering taking part of the money as tax-free cash, and then perhaps reinvesting it…

Many thanks for the info.

But the person has the option to defer once more. jamesd's argument is that stopping taking state pension and using the pension pot to live on for a number of years can give a better return. Obviously depends on the size of your state pension - which will be increased by 5.8% or 10.4% depending on the persons date of reaching state pension age. If they have already started taking SP after deferring for a couple of years then the increase is 10.4% per year.


Work out how many weeks/months/years of current state pension could be paid by using the pension pot then see how much the deferral will have increased by. - probably more than the annuity would be.

kidmugsy

Sapphire wrote: »

This isn't to do with a state pension, which has already been taken by the person concerned, after deferral for a couple of years.

But the state pension interacts with her the pension, as follows.



If the person took that state pension from the moment it was due, then she is entitled to defer it one more time and receive her eventual reward as Extra Pension (aka "increments") at a rate of 10.4% for each year of deferral. That's a wonderful deal. She should grab it with both hands.

What does she live off in the meantime? She'd use the capital from her tax-free lump sum, and a drawdown from the taxable part of her pot. For example if she took the TFLS in one go (she doesn't need to) she'd have approx £29k tax-free. She would then drawdown enough each year so that her taxable income used up her Personal Allowance against income tax (currently £11k p.a.).

Since the taxable part of her pot is approx £86k, she could carry on like this for some years until she had reduced her capital to the level where she'd like to retain what's left as an emergency fund, and then restart her State Pension. Or she could, say, carry on deferring until her State Pension will have grown to equal her Personal Allowance. Or she could carry on until her state of health, or the state of the economy, let her buy an annuity on attractive terms. She could choose whatever strategy appealed. There would be no need to choose the end-strategy now; just defer, take some lump sum and drawdown some taxable cash in such amount as to avoid paying income tax.

The point is that an index-linked 10.4% knocks the alternatives into a cocked hat. Avoiding income tax for some years makes it even more attractive.