What do BT mean by Annuity do you think?

Madeinireland

Hi,

I am a deferred member of section B of the BT pension scheme. I am currently considering options for taking my pension. I currently have a substantial AVC that runs alongside my pension and I had a plan to enable me to take the entire AVC tax free as part of my 25% tax free lump sum by converting some of my basic pension lump sum to additional pension. Unfortunately I have recently found that contrary to previous advice I may not be able to do that (currently being checked). In addition I understand the reverse commutation rates are not good so I may not want to do that anyway.

I understand that I can still take a max lump sum from my pension utilising the AVC’s but as the combination of the basic lump sum and my AVC’s exceeds the 25% limit I will be left with some residual AVC’s.

My options are effectively limited to 2...

1. Take it as a lump sum and suffer the tax hit associated with that. I don’t really want to do that as I think it would end up as a 40% hit if I look at income for the year.

2. (I will use the exact wording on the document for this) “Buy an annuity either through Hargreaves Lansdown or from another provider on the open market”

Option 2 would seem to be the best way forward if I understand annuity correctly. I don’t really want a full life annuity. I would in fact prefer some drawdown facility to enable me to have flexibility over the years to ensure I stay within the 20% tax bracket. I’m not sure whether their view on annuity would include flexible drawdown. What do you think? I will obviously ask them but they take ages to respond with anything sensible and I’m not sure I can trust their response given how they cocked up previous answers. If it doesn’t cover drawdown do you think it would cover fixed term annuities? My thought then is perhaps I can get a very short (says 3 years) fixed term annuity and then transfer the maturity value to a drawdown arrangement - I’m also assuming that I can do that? based on reading a few details about a couple of fixed term annuities that I have looked at - or is that not possible?

View on this appreciated please. I will be going to a IFA - just trying to set that up for after the Easter holidays but just thought I’d get some views here first Sam I know there are many knowledgable people on the site.

Thanks...

AlanP_2

What does the latest version of the scheme booklet say?

Madeinireland

Hi AlanP - It’s not very specific but in general it says the only way you can invoke drawdown is to transfer your ENTIRE AVC to a different scheme. With regards to using residual AVC it just says purchase an annuity.

Thanks...

Linton

Madeinireland wrote: »

Hi AlanP - It’s not very specific but in general it says the only way you can invoke drawdown is to transfer your ENTIRE AVC to a different scheme. With regards to using residual AVC it just says purchase an annuity.

Thanks...

Not many years ago drawdown was a niche option and the only thing most people could practically do with an AVC was to buy an annuity or possibly use it as the tax free lump sum for the main DB pension. So I think it is just old fashioned wording and the fact that you cannot drawdown directly from the AVC, though you can buy an annuity. If you transfer the AVC elsewhere you can do what you like with it.

xylophone

https://www.btpensions.net/assets/uploads/documents/AVC-options-leaflet-for-retirement-pack-22-July-website-version-pdf.pdf

Madeinireland

Hi xylophone - I’ve seen that document or similar but it really just confirms what I said originally - you are allowed to buy an annuity with the residue. Doesn’t say if that is a fixed term annuity or a full life annuity or indeed if there is a product that provides a drawdown solution that you can buy. I ‘now you can move ALL of the AVC to drawdown is another provider but I don’t want to do that as I want to use it to extract a maximum tax free lump sum.

Madeinireland

Hi Linton - So do you think that I can buy a fixed term annuity and then transfer to drawdown when that matures? The scheme specifically says you can’t transfer to drawdown unless you transfer the entire AVC which I don’t want to do. I can’t see why they would want to be restrictive and as you say fixed term annuities probably didn’t exist when they made up the rules.

Thanks...

xylophone

https://www.pensionsadvisoryservice.org.uk/about-pensions/retirement-choices/buying-an-annuity-how-to-shop-around/types-of-annuity

This booklet simply refers to "an annuity".

https://www.btpensions.net/assets/uploads/documents/AVC-Guide-Sept-18.pdf

You may use any of your AVC fund to purchase an annuity from an insurance company. If you take your maximum tax-free lump sum your remaining AVC fund must be paid within 6 months of your tax-free lump sum being paid (see note below if you wish to take a tax-free lump sum which is less than the maximum available to you) otherwise the Trustee may exercise its right to purchase an annuity on your behalf. The Scheme’s annuity broker is Hargreaves Lansdown and in the first instance we will generate annuity quotations for you using their annuity service. However, you are also permitted to purchase your own annuity (referred to as the Open Market Option) and you may wish to contact an independent financial adviser through https://www.unbiased.co.uk to help you with this option.

Linton

Madeinireland wrote: »

Hi Linton - So do you think that I can buy a fixed term annuity and then transfer to drawdown when that matures? The scheme specifically says you can’t transfer to drawdown unless you transfer the entire AVC which I don’t want to do. I can’t see why they would want to be restrictive and as you say fixed term annuities probably didn’t exist when they made up the rules.

Thanks...

No. Normally, once you buy an annuity that is it - you pay the money and get a steady income until you and possibly your spouse die. Until recently that was the standard way of using an AVC. The alternative is to go into drawdown where you can take whatever you want from your pension as and when you need it. However it becomes your responsibility to ensure that you dont run out of money.


If you want to go into drawdown you will need to transfer the AVC money elsewhere.

xylophone

but still have some AVCs remaining?
If the value of your AVCs is greater than 25% of the capital value of your total BTPS benefits then you will have some residual AVCs even after using them to maximise your tax-free cash.
Currently, there are 2 main options for residual AVCs:
 Purchase an annuity within 6 months of receiving your tax-free lump sum; or
 If your residual AVC fund is less than £5000, purchase additional Scheme pension.

If the type of annuity is not specified then presumably you have a choice?

Madeinireland

Hi xylophone and Linton,

Yes I think that is my point. With my residual if I have choice of annuity then I can specify a fixed term annuity for say 3 years with a maturity value that aims to maintain the majority of the lump sum and then switch it to a drawdown. That’s not the same as a full life annuity which is set in stone and I’m fairly sure one I’ve looked at allows a switch to a drawdown when it matures. So in effect I will have managed to eventually move my residual AVC to drawdown without having to move the entire AVC to drawdown which the BT pension scheme seems to require.

Thoughts welcome please.

Thanks...