£34.6k DC pot - take annuity tax free lump sum? or not?

AliPollyanna

Hi, I’d be grateful for advice please to help work out whether or not to take the 25% Tax Free Lump  Sum before buying an Annuity with the remaining taxable 75% of my DC £34,600 pension pot, because I will have unused tax allowance.  I’ve been doing a lot of homework into pensions and my preferred option is to purchase an Annuity (I don’t want the worry of having to manage a pension pot left invested for drawdown or flexible withdrawals of any kind- I know, no pain no gain).   

My quotes are based on Single life, for Life, No guarantees (loved ones are catered for in other schemes and we are accepting the risk of losing the capital if I die early), No enhancements for health, increasing with RPI, paid annually in arrears. The best quote so far is: No TFLS, £967pa (escalating) for life or £8.665 TFLS plus £718pa. (I’m still shopping around).

I’m retiring 1 yr before State Pension. I will only have income from a Defined benefit pension of £2.5k for tax year 2021-22’ therefore will still have £10k tax allowance available minus two months of State pension income next year.  I could use the TFLS to supplement my income before state pension kicks in but I’m not going to gain anything tax free because I’ll have unused tax allowance for this coming year.  As an ongoing plan I’ll need to drip feed existing savings every year to supplement my pensions.  Is it better not to take the TFLS and take the higher annual pension (rpi escalating) and use savings earning diddly squat instead?
BTW I was shocked to find the quote for paid annual in advance was £904pa versus ££967pa paid in arrears - it was chance that I asked. 
Sorry if this is a long question but I’ve tried really hard to do all the research, including reading many MSE posts, but well out of my comfort zone and my head is spinning. I even found myself an online compound interest calculator to play with and then couldn’t remember what I was trying to work out! I hope one of you wonderful wise contributors can help.
Many thanks xxx

newatc

Assuming you have no other savings, I would take the tax free amount so that I would have the comfort of an immediate emergency fund should I need it for what ever comes around.

dunstonh

I don’t want the worry of having to manage a pension pot left invested for drawdown or flexible withdrawals of any kind- I know, no pain no gain.

you need to decide your objectives.   If that is a primary objective, rather than going the absolute best thing, then annuity would make sense.     An annuity is unlikely to be the best outcome (although could be) but it will be the simplest.

My quotes are based on Single life, for Life, No guarantees (loved ones are catered for in other schemes and we are accepting the risk of losing the capital if I die early)

How does that compare to doing joint life and with guarantees (which can be 30 years or so since the pension freedom changes)?
There can be benefits of using more of your investable assets and having less on the annuity but more protection (such as on death before 75 and the annuity continuing for life of the spouse tax free)

Or if there are alternatives, then maybe take it from the alternatives and keep the pension invested.

BTW I was shocked to find the quote for paid annual in advance was £904pa versus ££967pa paid in arrears - it was chance that I asked. 

That suggests you have got a quote without proportion. That option can yield those sorts of differences.   

AliPollyanna

newatc said:

Assuming you have no other savings, I would take the tax free amount so that I would have the comfort of an immediate emergency fund should I need it for what ever comes around.

Thanks newstc, I have other savings so already have an accessible emergency fund. I’m only wondering whether to not take the lump sum and choose the higher annuity. 

dunstonh

With an annuity, you would always take the 25% unless you have a guaranteed annuity rate high above market rates.

shinytop

Have you thought of deferring your SP for a couple of years? You'd have to do the sums re your tax position but it might be worth a look. 

Linton

shinytop said:

Have you thought of deferring your SP for a couple of years? You'd have to do the sums re your tax position but it might be worth a look. 

Good point. Taking the 25%  lump sum and using it to finance defering your SP is well worth considering.  It is equivalent to buying an inflation linked annuity at 5.8% - a rather better deal than you have got for the 75%.

AliPollyanna

dunstonh said:

With an annuity, you would always take the 25% unless you have a guaranteed annuity rate high above market rates.

Hi dunstonh, thanks for all your comments. If I take the 25% now I don't think I'll get any benefit from it being tax free as I have unused tax allowance, so doesn't it gain more buying into the Annuity even if it's only gaining RPI increase?

AliPollyanna

dunstonh said:

I don’t want the worry of having to manage a pension pot left invested for drawdown or flexible withdrawals of any kind- I know, no pain no gain.

you need to decide your objectives.   If that is a primary objective, rather than going the absolute best thing, then annuity would make sense.     An annuity is unlikely to be the best outcome (although could be) but it will be the simplest.

My quotes are based on Single life, for Life, No guarantees (loved ones are catered for in other schemes and we are accepting the risk of losing the capital if I die early)

How does that compare to doing joint life and with guarantees (which can be 30 years or so since the pension freedom changes)?
There can be benefits of using more of your investable assets and having less on the annuity but more protection (such as on death before 75 and the annuity continuing for life of the spouse tax free)

Or if there are alternatives, then maybe take it from the alternatives and keep the pension invested.

BTW I was shocked to find the quote for paid annual in advance was £904pa versus ££967pa paid in arrears - it was chance that I asked. 

That suggests you have got a quote without proportion. That option can yield those sorts of differences.   

I'm afraid I do want something simple.  I think this pot would gain me at the best £1k pa.  I'm trying to achieve income of c.£16k pa, and will be using £3k of existing savings pa to achieve that but very low interest rates at the moment.  My husband is 10yrs older and we've decided he doesn't need my pension income if I die first - losing the capital is a gamble we're prepared to take.

A guarantee of 20yrs reduced the annual payout by over a hundred pounds. 

I had to look up what 'without proportion' meant, but you're correct, my annuity would die with me - I'm not quite sure why that affects paid in advance v. arrears. 

AliPollyanna

Linton said:

shinytop said:

Have you thought of deferring your SP for a couple of years? You'd have to do the sums re your tax position but it might be worth a look. 

Good point. Taking the 25%  lump sum and using it to finance defering your SP is well worth considering.  It is equivalent to buying an inflation linked annuity at 5.8% - a rather better deal than you have got for the 75%.

Hi Linton, thank you.  I will look into this. Does that mean my SP would be higher pa if I deferred it?

AliPollyanna

shinytop said:

Have you thought of deferring your SP for a couple of years? You'd have to do the sums re your tax position but it might be worth a look. 

Thank you Shinytop, I know you made the first comment on this.  Would this idea also be true for waiting a couple of years to buy an Annuity?  I'm worried about my pension pot reducing and not buying as much.

I think I'm sensing that none of you like annuities! 

In the overall scheme of things, with this size pension pot, is the decision between taking the lump sum or leaving it to buy the Annuity now going to cost/lose me hundreds or thousands over the next 30 yrs?