Help with annuities please

dunstonh

Would drawdown be a better option in my case?

its one of the alternative options but not the only one. A short-term annuity may be an option with its guaranteed maturity value. Or a hybrid which has some investment potential as well as a guaranteed minimum maturity value.

Malthusian

MoneysavingRookie wrote: »

My main concern is the situation with my debts, which I want to clear using the 25% tax free cash.

You can take the 25% tax free cash without buying an annuity.

I also wanted to ensure I had regular income to help with bills etc each month.

If your current income from working isn't sufficient to pay the bills without buying a rotten-value annuity, how are you going to pay the bills when you're no longer able to work and your only income is State Pension + a rotten-value annuity?

The Debt-Free Wannabe forum is likely to be of far more help to you than the Pensions one.

The point of making pension contributions is to provide for retirement. Using it to pay debts only makes sense if paying them will make you better off in retirement.

At your age you have plenty of time to run the debts back up again, at which point you will be in exactly the same position, only having lost 25% of your pension, and bought a crap-value annuity which will make you significantly worse off in retirement.

MoneysavingRookie

Malthusian wrote: »

You can take the 25% tax free cash without buying an annuity.



If your current income from working isn't sufficient to pay the bills without buying a rotten-value annuity, how are you going to pay the bills when you're no longer able to work and your only income is State Pension + a rotten-value annuity?

The Debt-Free Wannabe forum is likely to be of far more help to you than the Pensions one.

The point of making pension contributions is to provide for retirement. Using it to pay debts only makes sense if paying them will make you better off in retirement.

At your age you have plenty of time to run the debts back up again, at which point you will be in exactly the same position, only having lost 25% of your pension, and bought a crap-value annuity which will make you significantly worse off in retirement.

Thanks again Malthusian,

I am planning on working up until at least retirement age of 65/67 so will have income going forwards, but wWould it be a better option to buy drawdown in this instance then?

OldMusicGuy

You don't have to "buy" drawdown. Depending on the type of pension you have, it's a way of using the money once you reach 55. With my pension provider, I can allocate some or all of my pension pot as going into drawdown. I can take 25% of the amount I nominate tax free, and the rest stays invested for me to do with as I wish. I can leave it alone, take as much or as little out as I want at any time, subject to income tax.

So for example if I had £100,000 in a pension pot and I moved it all into drawdown, I could take 25,000 tax free straight away. I can leave the remaining 75,000 invested so that it grows (tax free). I can also take money from the 75,000 whenever I want, but that would be subject to income tax. So I could take out up to the personal allowance each year from the 75,000 and not pay tax on that (assuming I had no other income).

Your best bet may be to take the 25% tax free and leave the rest invested, maybe drawing some out only when you have to because your current income doesn't cover all your costs. But those would be subject to tax. The good news is that if you die, all the money left in the pension pot passes to your wife tax free.

Like everyone else said, buying an annuity aged 55 is a really poor use of your pension in most circumstances.

The Pensionwise person should have explained all of this to you, it sounds like you didn't have a very good experience with them.

MoneysavingRookie

OldMusicGuy wrote: »

You don't have to "buy" drawdown. Depending on the type of pension you have, it's a way of using the money once you reach 55. With my pension provider, I can allocate some or all of my pension pot as going into drawdown. I can take 25% of the amount I nominate tax free, and the rest stays invested for me to do with as I wish. I can leave it alone, take as much or as little out as I want at any time, subject to income tax.

So for example if I had £100,000 in a pension pot and I moved it all into drawdown, I could take 25,000 tax free straight away. I can leave the remaining 75,000 invested so that it grows (tax free). I can also take money from the 75,000 whenever I want, but that would be subject to income tax. So I could take out up to the personal allowance each year from the 75,000 and not pay tax on that (assuming I had no other income).

Your best bet may be to take the 25% tax free and leave the rest invested, maybe drawing some out only when you have to because your current income doesn't cover all your costs. But those would be subject to tax. The good news is that if you die, all the money left in the pension pot passes to your wife tax free.

Like everyone else said, buying an annuity aged 55 is a really poor use of your pension in most circumstances.

The Pensionwise person should have explained all of this to you, it sounds like you didn't have a very good experience with them.

Hi OldMusicGuy.


Thanks very much for taking the time to reply again it is much appreciated.
It looks like the main consensus is to avoid annuities and look at the other options available as most of the guys on here have said. I will look in depth at the drawdown option and make a decision after talking to my current pension provider.


Pension-wise meeting was ok but not perfect regarding advice on my purchasing options, saying that maybe I did not ask them enough questions.

dunstonh

Pension-wise meeting was ok but not perfect regarding advice on my purchasing options, saying that maybe I did not ask them enough questions.

Pensionwise do not give advice. They give generic information only. They are quite good at that but the main issue is that they have no knowledge on market issues or hybrid options.

i.e. its almost a text book answer rather than a real world answer.

AnotherJoe

MoneysavingRookie wrote: »

Hi Dunstonh.

I know it's not probably the best option but I was hoping to not use an IFA in this process.

.

Think about that statement for a minute.

Why on earth would you NOT want the best option ????

It's clear you are at sea with the options here. If you just blunder about you are almost certain to make some bad mistakes and some of them could be irrevocable.

You could pay for an hour or twos worth of IFA time to get some solid pointers on the best way to structure your pensions and drawdown over the next few years to minimise tax and ensure you don't make any mistakes. Or ensure you don't end up taking out an annuity that would pay you less than you could just drawdown simply because in order to save some money you didn't use an IFA and then lost more money than the IFA would have cost.

For example, and this might not be a consideration in your case, did you know that once you've taken the 25% tax free, if you even take 1p of taxable pension after that, you are then limited to no more than £4K gross contribution into a pension after that.?

jamesd

MoneysavingRookie wrote: »

Would drawdown be a better option in my case?

Better is hard to say but you'd be looking at roughly between two and three times the income for the same amount of money. And still being able to take a tax free lump sum, of course. About 5.3 of your pot after taking the tax free lump sum is doable. More if you're willing to take a higher chance of cuts if investments don't do OK.

You get more because you're being flexible and willing to reduce income to below that three times if you happen to live through bad investing times. An annuity has no flexibility so it has to assume the worst case to ensure it always pays the specified amount.

However, you intend to carry on working. If that will provide enough income you can just take the 25% tax free and put the rest into a drawdown account and just leave it invested there until later.

MK62

jamesd wrote: »

Better is hard to say but you'd be looking at roughly between three and four times the income for the same amount of money.

Isn't that pushing it a bit too far?

AnotherJoe

I agree I'd have thought it would be 2x-3x from a quick look at annuity "best rate" tables.