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

Dazed_and_C0nfused

Given the unused Personal Allowance available in 2021:22 have you considered taking the whole lot in one go (or spread over two years if you will have any spare Personal Allowance in 2022:23 as well)?

From what you've posted and assuming State Pension of c£1,500 in 2021:22 you would have c£31k after tax.

AliPollyanna

Dazed_and_C0nfused said:

Given the unused Personal Allowance available in 2021:22 have you considered taking the whole lot in one go (or spread over two years if you will have any spare Personal Allowance in 2022:23 as well)?

From what you've posted and assuming State Pension of c£1,500 in 2021:22 you would have c£31k after tax.

Hi Dazed and Confused
State Pension forecast £10k pa (opted out portion in a DB pension of £2.5k pa), so (unless I deferred SP as suggested) I will reach my tax allowance with those two pensions in tax yr 2022-23 onwards.  I have another DB pension of £3.5k from SP age.
I think you are suggesting that I invest my pot in something other than an Annuity.  But with rates so low at the moment if I want a low risk investment, is there no value in an Annuity which keeps up with inflation?
Thanks for your patience with these questions - I'm out of my depth!

Linton

AliPollyanna said:

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?

Your SP for the rest of your life will increase by 5.8% for each year you defer.  So if you were to get £9K SP you could instead defer for a year using £9K ( or rather less depending on you tax situation) from your Tax Free Lump Sum to replace the SP income.  This would mean that SP for subsequent years would increase by £522/year.  If you spent the £9K on an inflation linked annuity you would get about half that.

You can continue to defer for as long as you like though sadly the 5.8% is simple interest, not compound.  However at some point the benefit disappears as annuity rates rise with age and your chance of not living to get the benefits of deferral increases.

AliPollyanna

Dazed_and_C0nfused said:

Given the unused Personal Allowance available in 2021:22 have you considered taking the whole lot in one go (or spread over two years if you will have any spare Personal Allowance in 2022:23 as well)?

From what you've posted and assuming State Pension of c£1,500 in 2021:22 you would have c£31k after tax.

I see what you mean.  I'd be getting another £6k+ of tax free cash from my pot by fully using my tax allowance for 2021-22.
So, if I took out the TFLS & £6k+ to maximise the tax free opportunities from my pot, is it worth buying an Annuity with the remaining taxable c.£26k?  
I'm afraid I really don't want to get involved with Stocks and Shares investing so the interest rates I'd be likely to get would be pretty low.

Linton

AliPollyanna 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. 

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?

Remember that this forum is largely inhabited by people who enjoy investing and are happy to take the associated risks for the likely extra income that would be gained.  If you dont want to get involved in investing and want a guaranteed financial future your only option is an annuity.

To get some idea of the difference:
Currently from your figures an inflation linked annuity rate is about £2800 per £100K cost.  From investing £100K historically reasonable sustainable drawdowns are around £3500 to £5000 depending on how flexible you can be with your spending, but of course this is not guaranteed.  Another factor is that if you buy an annuity there is nothing left after you die, unless you pay extra.  WIth investments one (or one's beneficiaries) could hope for a reasonable pot to be left at death.

So you make your choice.  There's no perfect solution.

Dazed_and_C0nfused

AliPollyanna said:

Dazed_and_C0nfused said:

Given the unused Personal Allowance available in 2021:22 have you considered taking the whole lot in one go (or spread over two years if you will have any spare Personal Allowance in 2022:23 as well)?

From what you've posted and assuming State Pension of c£1,500 in 2021:22 you would have c£31k after tax.

I see what you mean.  I'd be getting another £6k+ of tax free cash from my pot by fully using my tax allowance for 2021-22.
So, if I took out the TFLS & £6k+ to maximise the tax free opportunities from my pot, is it worth buying an Annuity with the remaining taxable c.£26k?  
I'm afraid I really don't want to get involved with Stocks and Shares investing so the interest rates I'd be likely to get would be pretty low.

Maybe deferral of the State Pension would be a better non stock market investment.

After the 25% TFLS you have £26k.  If you just had the £2.5k DB pension as your only taxable income you could take £10k of taxable pension income in 2021:22 and again in 2022:23 leaving just £6k in the fund.

If you deferred your State Pension long enough into 2023:24 to leave £6k of unused Personal Allowance you could get all £34.6k without paying any tax.

And then have a decent uplift to your State Pension from 2-3 years of deferment.  Which lasts for as long as you live.

As with anything like this you have to be very careful to check your figures are right and there will be other options which may be better for you.

AliPollyanna

Dazed_and_C0nfused said:

AliPollyanna said:

Dazed_and_C0nfused said:

Given the unused Personal Allowance available in 2021:22 have you considered taking the whole lot in one go (or spread over two years if you will have any spare Personal Allowance in 2022:23 as well)?

From what you've posted and assuming State Pension of c£1,500 in 2021:22 you would have c£31k after tax.

I see what you mean.  I'd be getting another £6k+ of tax free cash from my pot by fully using my tax allowance for 2021-22.
So, if I took out the TFLS & £6k+ to maximise the tax free opportunities from my pot, is it worth buying an Annuity with the remaining taxable c.£26k?  
I'm afraid I really don't want to get involved with Stocks and Shares investing so the interest rates I'd be likely to get would be pretty low.

Maybe deferral of the State Pension would be a better non stock market investment.

After the 25% TFLS you have £26k.  If you just had the £2.5k DB pension as your only taxable income you could take £10k of taxable pension income in 2021:22 and again in 2022:23 leaving just £6k in the fund.

If you deferred your State Pension long enough into 2023:24 to leave £6k of unused Personal Allowance you could get all £34.6k without paying any tax.

And then have a decent uplift to your State Pension from 2-3 years of deferment.  Which lasts for as long as you live.

As with anything like this you have to be very careful to check your figures are right and there will be other options which may be better for you.

Thank you Dazed and Confused, Linton and everyone else for all your help.
Deferring State Pension definitely seems like a good idea and not one that I've considered before.  I will double check all my figures but I'm feeling a bit braver about all this and really value your ....I'm probably not allowed to say 'Advice' ....knowledge and suggestions. Many many thanks. AP x

shinytop

AliPollyanna 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. 

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?

I think you've been answered already but a combination of annuity and SP deferral might work well for you and be better value than just an annuity.  And yes annuities are also cheaper the older you are.  I will definitely consider this sore to approach for myself.  Good luck!