Taking AVC as cash or Annuity / Drawdown ?

PhilRT1962

Hello all

I would be grateful for any advice on my situation please as I am not exactly sure what to do.

My position if I have just left work after some ill health at 59 and plan to take my LGP at aged 60.  I have been paying into the LGP scheme since I was 18 with no breaks.  In planning for my retirement I also paid into an AVC and have a balance of approx. £176K.

When I take my LGP pension it will be about £20K per annum and also have some rental income of approx. £20K per annum.

The amount of my AVC I can get tax free is about £145K and this is where I would appreciate some advice.

I would like to think that would spend that £145K over the next 15 to 20 years travelling etc.  If I make it to 80 I will be happy to sit in a chair some where admiring the views.  At the back of my mind is the memory that my father retired at 65 and died 3 years later.

What concerns me is if I buy an annuity or do some found of drawdown I will be taxed on the income at 20%.  One quote I got from my provider was my £145k would buy me approx £3.5K per annum (£2.7 after tax)

On the over hand if I was simply to take the whole £145k as tax free cash I could stick it in a bank or some of saving account and draw down myself.  If over 15 years that would be a about £10k per annum (v's £2.7k).  I appreciate there is the question of inflation etc and my funds decreasing in real terms but buying an annuity does a bit of a hit.

So I am totally barking up the wrong tree here or have I missed some fundamental point that I should take into amount.

Would be grateful or any advice or comments.

Many thanks for your time.

Regards

Phil

Albermarle

On the over hand if I was simply to take the whole £145k as tax free cash I could stick it in a bank or some of saving account and draw down myself.  If over 15 years that would be a about £10k per annum (v's £2.7k).  I appreciate there is the question of inflation etc and my funds decreasing in real terms but buying an annuity does a bit of a hit.

Over the time scale involved it would make sense to invest at least part of the money to at least try and beat inflation , as opposed to keeping it all in savings accounts . Although investments can go up and down in the short/medium term , historically at least they have gone up in the long term ( > 10 years ) .

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Investing for beginners: Why do we invest? - Monevator

MX5huggy

Don’t buy an Annuity, you don’t need regular income, you have lots of that already (don’t forget state pension). 

So it’s just a simple question of what to do with £145k. Yes you’ll pay a bit of tax on the income on it but don’t let that dictate what to do with it. ISA each year, invest for anything you plan to spend 10 plus years. With the savings allowance dividends allowance and the Capital gains tax allowance I doubt they’ll be much tax due. 

dunstonh

The amount of my AVC I can get tax free is about £145K and this is where I would appreciate some advice.

Taking it out to put it in the bank would be daft in most cases.  However, about leaving it in the pension (or another pension) until you do need it?  i.e. doing annual UFPLS to fund your objectives?

What concerns me is if I buy an annuity or do some found of drawdown I will be taxed on the income at 20%.  One quote I got from my provider was my £145k would buy me approx £3.5K per annum (£2.7 after tax)

An annuity could be that low with a bunch of unnecessary options selected.  Drawdown using a sustainable rate would be around £5k a year.   Or more if you plan to erode the capital over time.

So I am totally barking up the wrong tree here or have I missed some fundamental point that I should take into amount.

You should match the pension with your objectives. At the moment, you don't appear to be.   You also need to look at all options available.  And not just those of the current provider.

PhilRT1962

dunstonh said:

Taking it out to put it in the bank would be daft in most cases.  However, about leaving it in the pension (or another pension) until you do need it?  i.e. doing annual UFPLS to fund your objectives?

If I put in into another pension I presume it will be treated as income and taxed accordingly (20%) I am thinking will any investment or pension over 15 -20 years recoup the 20% I will loss in tax ?

Dazed_and_C0nfused

Bit you would get 25% added (20% of the gross contribution) and then 25% of the fund is tax free.

Albermarle

Taking it out to put it in the bank would be daft in most cases.  However, about leaving it in the pension (or another pension) until you do need it?  i.e. doing annual UFPLS to fund your objectives?

The AVC is £176K but the OP can have £145 K tax free , presumably because of the link with the LGPS DB scheme .

I assumed it would be an all or nothing scenario ( possibly wrongly ), and they would have to take it all at once .

OP - Do you know if you can take it in tranches?

Also would the OP be able to transfer a pension of this nature to another provider without losing the very enhanced tax free cash.?

dunstonh said:

Taking it out to put it in the bank would be daft in most cases.  However, about leaving it in the pension (or another pension) until you do need it?  i.e. doing annual UFPLS to fund your objectives?

If I put in into another pension I presume it will be treated as income and taxed accordingly (20%) I am thinking will any investment or pension over 15 -20 years recoup the 20% I will loss in tax ?

I think Dunstonh meant to transfer it another pension . As to take it out and add it to another pension and get tax relief, you would need to be earning £145K pa.

PhilRT1962

Albermarle said:

 .

OP - Do you know if you can take it in tranches?

Many thanks for the replies

The options I have been given in relation to my AVC are as follows:

A = Take a tax free sum up to 25% of my overall fund so £145K
B = Buy a top up LGPS pension :
C = Buy an annuity through the Prudential.  (Offer £3.5k pa)
D = Buy one or more annuities from insurance / banks etc at the same time as taking my main scheme benefits.

Regards  Phil

MX5huggy

Do A, that’s the point of the AVC. With the remainder get a Quote from B which will probably be better value than C or D. 

Secret2ndAccount

Yes, you've done a great job building your pension, and the matching AVC to get the lump sum. Take the 145k now. Maybe, as PhilRT says, you could transfer the remaining AVC into the LGPS for a higher pension (option B ). Or, if you don't think you will need a higher annual pension, I would have thought it is possible to leave it in place for now, or transfer it to another provider.

I would favour investing a good proportion of your lump sum. You can go for moderate risk - just to try to fend off inflation as you need to store it away for many years.
If investing is not for you, then look around for the best savings rates. Right now you can get 1.7% for a 1 year fix. Then review in 1 year as I believe interest rates will be higher then. If you can get 2.5% for a 3 year fix, you might find you are able to keep up with inflation.

PhilRT1962

Secret2ndAccount said:

Yes, you've done a great job building your pension, and the matching AVC to get the lump sum. Take the 145k now. Maybe, as PhilRT says, you could transfer the remaining AVC into the LGPS for a higher pension (option B ). Or, if you don't think you will need a higher annual pension, I would have thought it is possible to leave it in place for now, or transfer it to another provider.

I would favour investing a good proportion of your lump sum. You can go for moderate risk - just to try to fend off inflation as you need to store it away for many years.
If investing is not for you, then look around for the best savings rates. Right now you can get 1.7% for a 1 year fix. Then review in 1 year as I believe interest rates will be higher then. If you can get 2.5% for a 3 year fix, you might find you are able to keep up with inflation.

Thanks all and Secret2ndAccount for all the useful advice