Deciphering annuity options!

loopa1

Hi all
Just been reading through the options presented to my F-in-L re. one of his pension pots. He's whittled his choice down to two of the options presented. But first, approximately:

His pension DB is £8k per year, his AVC pot is £80k.

Option 1 is to recieve his £8k pension DB, take approx. £60k as a tax free lump sum, with the remaining £20k being paid out via annuity at a rate of £2k per year.

Option 2 is to recieve his £8k pension DB, do not take a lump sum, and all AVC is paid out via annuity at a rate of £500 per year.

What we can't understand is if he opts for option 1, with most of his AVC contributions being paid out as a tax free lump sum, why would the annuity (based on £20k and not £80k) be a larger amount?

In both cases for the annuity, the number of years it'd be paid out over wasn't provided, and are both based on joint, inflation protected schemes (so we're comparing like for like).

I'm sure there's an obvious answer!!

Many thanks.

lisyloo

i think these figures have been mixed up.

£500 relates to £20k which = 2.5%
And
£2k relates to £80k which = 2.5%

That would make much more sense and the rate is the same.

loopa1

That crossed my mind...if they've mixed the figures up, and put them in the tables the wrong way around. I'll advise he checks with the pension provider.

xylophone

Does he have the option of transferring the AVC to a SIPP?

He could then take the money as best suited his tax position?

Has he obtained a state pension statement?

green_man

How old is your FiL?

2.5% is pretty low, is this a flat rate or inflation linked etc?.

As said above he should be able to transfer his AVC portion to a more flexible drawdown provider. But of the above the 60k tax free would seem preferable to me.

loopa1

xylophone
SIPP...no, i don't believe so. FiL is now retired and not looking to manage any investment himself. He has his state pension statement and is now in receipt of it.

green_man
FiL is 65. The 2.5% is based on inflation...flat rate was a little higher. He does have the option to transfer the AVC, but at present, his mindset is very much "i want minimal effort" - i did explain he's paying for convenience by letting the pension provider manage his AVC annuity for him. I suspect his head may be turned if I can show him the benefit (£££!) of moving it elsewhere!

Where would you put the £60k? I'd imagine he'd want to drawn down on it a few times a year. To get the remaining £20k AVC out, i believe the first 25% is tax free also, so taxed on £15k.

Thanks for the advice all. It's really appreciated.

pafpcg

loopa1 wrote: »

His pension DB is £8k per year, his AVC pot is £80k.

Option 1 is to recieve his £8k pension DB, take approx. £60k as a tax free lump sum, with the remaining £20k being paid out via annuity at a rate of £2k per year.

What am I missing here? How does he get a £60k tax-free lump sum (TFLS) which is 75% of his pension pot? My understanding is that the TFLS is limited to 25% of the pot and should be only £20k (leaving £60k to buy an annuity).

PS: Is the annuity being offered by the pension provider? The standard advice is to seek quotes from other annuity providers.