Do you have to buy an annuity

Litchielou

My other half will be made redundant in February and because of his age will not be getting another job. He can access his works pension and will get a large pay off.
My question is do you have to purchase an annuity or can you decide yourself how you
Manage the money.
We can live of his yearly pension so will not need to go into the lump sum unless we want
A treat. We are not one for expensive holidays, the house has been refurbished whilst we were
Working.

Silvertabby

Is the pension final salary or money purchase?

Litchielou

Final salary

dunstonh

My question is do you have to purchase an annuity or can you decide yourself how you

There has been no requirement to buy an annuity since 2006. Also, the type of pensiony your OH has doesnt involve annuities.

We can live of his yearly pension so will not need to go into the lump sum unless we want

With many defined benefit schemes, it can be best, financially, not to take the lump sum or at least take a reduced amount. Have you compared with and without lump sum (or options in between)?

Litchielou

Yes, the way he gets his money will suit us best.
Thanks

jamesd

He has a great opportunity. He can pay into a personal pension up to his gross pay minus the value of the increase in his works pension for this year. Then he can almost immediately take out a quarter of that as a tax free lump sum. The rest over time to save some tax. This will save him the income tax on 25% of his pay this year.

A big part of many redundancy payments counts as pay for this so he could use that money to help get some free extra money from the tax man.

If his pay is more than £30,000 or if he will get a lump sum from the works pension more detailed calculations are needed to stay within the lump sum recycling limits. His redundancy payment can make this easy because it helps to increase the limits. If the amount to be paid in is more than £40,000 some more checks are needed to see just how high he can go, probably well over £100,000 if he has that much in pay or counting as pay redundancy money.

Even if you are not working you can pay in £2,880, get tax relief even if not a tax payer and take out £3,600. If you have enough personal allowance that can be a free extra £720 a year. Can take out from age 55 and pay in until age 75. He can do the same in future years.

For the type of pension used for this you can take the money as you need it, no restrictions any more. Except for a 25% tax free part it counts as taxable income so if you took out a lot in one tax year some could be taxed at 40%. Easy way to reduce that is to do the taxable taking out over more than one tax years.

Litchielou

As we have been told by the works pension dept his monthly pension he will not pay tax.
But surely the lump sum and redundancy payment you will only pay tax on the interest but £1000
Of that is tax free so it will only be taxed on the interest above the £1000 is that correct.
Sorry if I'm asking silly questions but this is new to us.

AnotherJoe

Litchielou wrote: »

As we have been told by the works pension dept his monthly pension he will not pay tax.
But surely the lump sum and redundancy payment you will only pay tax on the interest but £1000
Of that is tax free so it will only be taxed on the interest above the £1000 is that correct.
Sorry if I'm asking silly questions but this is new to us.

No, its not correct at all, you are confusing the limit on interest with tax on income. You need to see an IFA just to sort out the immediate opportunity, as said there are some ways you could potentially save many thousands of pounds by doing the right thing with the redundancy money.

jamesd

A monthly pension is normally taxable income paid using PAYE. There will be no income tax due on it if his total taxable income is up to £11,000 a year, or £11,500 from next tax year. There is no national insurance deduction from pension payments, just possibly income tax.

For redundancy payments the first £30,000 is tax free. The rest is taxable pay subject to income tax but not national insurance. If it is more than £30,000 this creates the opportunity to save a lot of income tax by paying at least the taxable part into a pension.

If you can tell us his pay so far this year, the expected redundancy pay and pension as well as his age we should be able to give a rough idea of how much income tax can be saved so you'll know whether it's a big deal or not.