Can anyone tell me if this pension math is correct please?

Jon_01

I'm tying to work the tax for a mate whose going hit pension age in August this year.

He'll get the full pension of £884.25 a month (checked with the gov site)
He also gets PiP which will be £487.80 (long term illness)
And he'll buy an annuity which will be between £200 to £300 a month (he's still looking at plans, but has around £70k to use)

As far as I can see, and providing the info on the gov site it right, the PiP is tax free. So the total for tax reasons will be the state pension plus the annuity.
That would be £884.25 + £250 (as a middle figure) = 1,135.25 a month, £13,611 a year.
Personal Allowance is £12.500, so taxable figure would be 1,111

Does that seem correct?

I am going get him to call the PAS closer to August, he's just looking for an idea on the numbers.

Thanks.

Dazed_and_C0nfused

State pension isn't paid monthly.  Do you mean £221/week or £204/week?

Personal Allowance is £12,570 in 2021:22.

No tax would be payable in 2021:22 as only part year of pension income.

Does he have other pensions to come into payment at a later date?

Is an annuity his best option?

Jon_01

Dazed_and_C0nfused said:

State pension isn't paid monthly.  Do you mean £221/week or £204/week?

Personal Allowance is £12,570 in 2021:22.

No tax would be payable in 2021:22 as only part year of pension income.

Does he have other pensions to come into payment at a later date?

Is an annuity his best option?

Sorry, yes, £221 weekly, I worked it out monthly for him.
No other pensions at all.
As to the annuity, I don't know? As far as I know that's what he was offered by the company he's been paying into?

Albermarle

As to the annuity, I don't know? As far as I know that's what he was offered by the company he's been paying into?

Many older pensions only offer you the option of an annuity (or take the whole lot as cash, which is usually not a good idea)  but you should also have the option to transfer the pot out to a more modern pension 

More modern pensions offer 'drawdown' . This means the pot is left invested in the pension and you take income from it .

The main advantages are that you can vary the income and if there is anything left in the pot when you die it can go to your beneficiaries.

The main disadvantage is that you have to keep an eye on the investments and be careful not to take too much income from it too quickly, or it will run out .

Normally you would expect to get a better result from drawdown than an annuity but that is not guaranteed , and the annuity income is .

Marcon

Jon_01 said:

Dazed_and_C0nfused said:

State pension isn't paid monthly.  Do you mean £221/week or £204/week?

Personal Allowance is £12,570 in 2021:22.

No tax would be payable in 2021:22 as only part year of pension income.

Does he have other pensions to come into payment at a later date?

Is an annuity his best option?

Sorry, yes, £221 weekly, I worked it out monthly for him.
No other pensions at all.
As to the annuity, I don't know? As far as I know that's what he was offered by the company he's been paying into?

If he has a long term illness, he may (depending on what the illness is) qualify for something known by the ghastly jargon of 'impaired life annuity'. In English, that means he might get a better deal if the annuity provider believes his illness could mean he has a shorter than normal life expectancy.

He would be well advised to do a bit of shopping around, not just 'buy' from the pension company with whom he has been saving, unless his policy has something called a Guaranteed Annuity Rate, which means he could well get a better deal from them than anyone else.

Has he checked to see if he has the option of taking a tax free cash lump sum and whether that would be worth doing (e.g. if he has debts to pay off)?

An appointment now with PensionWise, depending on his age, might make sense: https://www.pensionwise.gov.uk/en

Jon_01

Marcon said:

Jon_01 said:

Dazed_and_C0nfused said:

State pension isn't paid monthly.  Do you mean £221/week or £204/week?

Personal Allowance is £12,570 in 2021:22.

No tax would be payable in 2021:22 as only part year of pension income.

Does he have other pensions to come into payment at a later date?

Is an annuity his best option?

Sorry, yes, £221 weekly, I worked it out monthly for him.
No other pensions at all.
As to the annuity, I don't know? As far as I know that's what he was offered by the company he's been paying into?

If he has a long term illness, he may (depending on what the illness is) qualify for something known by the ghastly jargon of 'impaired life annuity'. In English, that means he might get a better deal if the annuity provider believes his illness could mean he has a shorter than normal life expectancy.

He would be well advised to do a bit of shopping around, not just 'buy' from the pension company with whom he has been saving, unless his policy has something called a Guaranteed Annuity Rate, which means he could well get a better deal from them than anyone else.

Has he checked to see if he has the option of taking a tax free cash lump sum and whether that would be worth doing (e.g. if he has debts to pay off)?

An appointment now with PensionWise, depending on his age, might make sense: https://www.pensionwise.gov.uk/en

Thanks. 
There's no 'Guaranteed Annuity Rate' at least that I can find on the paperwork.
He and I have been looking around at annuities.  There seems a Huge difference from company to company?  He'll have 70k.  One company came in at £188 a month, I've just completes an online quote with L&G and they offered £318!  That's with just taking a monthly sum with no yearly % increase and not ticking any other boxes!
I don't believe the impaired life annuity option applies, but I will pass that on

He retires August this year, hence why we're doing this.  I have told him to contact Pensionwise, I'll press him to do that sooner rather than later now..

westv

I cant believe the forum police removed my post! 

Albermarle

He'll have 70k.  One company came in at £188 a month, I've just completes an online quote with L&G and they offered £318!  That's with just taking a monthly sum with no yearly % increase 

With no inflation increase £318 looks about right , quite good in fact .

With inflation increases included it will drop a lot as it is expensive to keep up with inflation. 

Jon_01

Albermarle said:

He'll have 70k.  One company came in at £188 a month, I've just completes an online quote with L&G and they offered £318!  That's with just taking a monthly sum with no yearly % increase 

With no inflation increase £318 looks about right , quite good in fact .

With inflation increases included it will drop a lot as it is expensive to keep up with inflation. 

But then, as far as I can see. The better the deal he gets on the annuity the more tax he pays?  So would it not be a better idea to take the hit on the monthly to add the inflation % and drop the total to pay less tax?
Assuming that I've read that right?  ie, that the PiP is in fact a tax free payment?

jamesd

Jon_01 said:

And he'll buy an annuity which will be between £200 to £300 a month (he's still looking at plans, but has around £70k to use)

At the rates you've given so far that would be a massive mistake.

Jon_01 said:

He and I have been looking around at annuities.  There seems a Huge difference from company to company?  He'll have 70k.  One company came in at £188 a month, I've just completes an online quote with L&G and they offered £318!  That's with just taking a monthly sum with no yearly % increase and not ticking any other boxes!
I don't believe the impaired life annuity option applies, but I will pass that on

Even L&G is only paying 5.45% for an annuity with no inflation increases. £188 a month is 2.69%.

Those are horrendously bad choices. Why? If he just defers claiming the state pension it'll be increased by 5.8% plus the triple lock increase for each year he defers, pro-rated for less than a year.

Say he does this for five years, paying himself £884.25 a month from his pot. £10,611 a year. He'll have drawn 5 * £10,611 = £53,055 from his pot with £16,945 left. His monthly state pension will be increased by 5 * 0.058 * £884.25 (and the five years of triple lock) =  £256.43 a month. That £256.43 is increased by CPI inflation every year for life, instead of gradually losing value to inflation.

Each deferred year adds £51.28 a month. If he wants to match L&G but with inflation protection, he could defer for 318 / 51.28 = 6.2 years at a cost of £65,788.

There's little chance that he'll get an annuity deal to beat this. If it does initially it'll probably be without inflation protection and worse after a few years.

When looking at annuity quotes it's vital that he gets asked health and lifestyle questions. If he doesn't get asked he'll almost certainly be offered too little. To give some idea, with £100k spend, HL for a 65 year old says £4,808 but for a smoker £5,406 a year, both without inflation increases, and without taking into account other possible health or lifestyle factors. That's £400.66 or £450.50 a month.

Jon_01

jamesd said:

Jon_01 said:

And he'll buy an annuity which will be between £200 to £300 a month (he's still looking at plans, but has around £70k to use)

At the rates you've given so far that would be a massive mistake.

Jon_01 said:

He and I have been looking around at annuities.  There seems a Huge difference from company to company?  He'll have 70k.  One company came in at £188 a month, I've just completes an online quote with L&G and they offered £318!  That's with just taking a monthly sum with no yearly % increase and not ticking any other boxes!
I don't believe the impaired life annuity option applies, but I will pass that on

Even L&G is only paying 5.45% for an annuity with no inflation increases. £188 a month is 2.69%.

Those are horrendously bad choices. Why? If he just defers claiming the state pension it'll be increased by 5.8% plus the triple lock increase for each year he defers, pro-rated for less than a year.

Say he does this for five years, paying himself £884.25 a month from his pot. £10,611 a year. He'll have drawn 5 * £10,611 = £53,055 from his pot with £16,945 left. His monthly state pension will be increased by 5 * 0.058 * £884.25 (and the five years of triple lock) =  £256.43 a month. That £256.43 is increased by CPI inflation every year for life, instead of gradually losing value to inflation.

Each deferred year adds £51.28 a month. If he wants to match L&G but with inflation protection, he could defer for 318 / 51.28 = 6.2 years at a cost of £65,788.

There's little chance that he'll get an annuity deal to beat this. If it does initially it'll probably be without inflation protection and worse after a few years.

When looking at annuity quotes it's vital that he gets asked health and lifestyle questions. If he doesn't get asked he'll almost certainly be offered too little. 

Thank you fo all of that!!
But, I've just checked the gov site on deferring and that say that if you get certain benefits then you can't defer.  He's getting both PiP and ESA, and they state that if you get ESA then you can't build up the pension?