Pension question

Dex58

I was made redundant in December. I’m aged 64 & probably won’t go back to work. I’ll receive a full state pension at 66 and I’ve saved into a private pension which should be adequate to provide for me in retirement.

I’m currently living off savings including my redundancy payment which should see me through till state pension age. 

My question refers to a small occupational pension that started in the early 80s. Its now managed by Phoenix life & has some kind of with profits element. It has always performed terribly. A few hundred pounds that grew over the next 40 years to just over £2.5k. However it did have some guarantees. It was guaranteed to pay out £8.5k at age 62. It also has a guaranteed annuity rate of approx 10%.

I’ve left it untouched to date so it’s now worth almost £10k.

I have the usual options of buying an annuity, taking the cash or transferring to another provider.

I’m thinking about cashing in the whole amount.

The flat rate annuity would pay about £82 per month (guaranteed for 5 years).

If I took the cash I believe it would be tax free as I will likely have no other taxable earnings in the 2022/23 tax year. So it would be a good time to take the money & have done with it. As opposed to receiving a small taxable amount (£1k per year approx) in the future.

Are my assumptions re tax correct? Am I missing anything?

Your thoughts please…..

Dazed_and_C0nfused

If the £10k (or likely £7.5k taxable element) was your only taxable income then yes, ultimately you will pay no tax on it.

But is that really the sensible option if you can get a guaranteed 10% return if left where it is??

It was guaranteed to pay out £8.5k at age 62. It also has a guaranteed annuity rate of approx 10%.

I’ve left it untouched to date so it’s now worth almost £10k.

dunstonh

My question refers to a small occupational pension that started in the early 80s. Its now managed by Phoenix life & has some kind of with profits element. It has always performed terribly. A few hundred pounds that grew over the next 40 years to just over £2.5k. However it did have some guarantees. It was guaranteed to pay out £8.5k at age 62. It also has a guaranteed annuity rate of approx 10%.

Plans with guarantees nearly always have low rates of return as the value is in the guarantees. Not the rate of return.

Am I missing anything?

Can you get better than the double digit annuity rate?

Albermarle

A flat rate annuity of £82 per month , would cost over £20K to buy in the open market. 

af1963

How about drawing some of the money from your other private pension ( which won't have a guaranteed annuity rate) and taking that as effectively tax-free during 2022-23 ?  If you have no other income, you could take out £12570 as taxable income which falls within your tax free allowance, plus a tax free sum of £4190, giving almost £17K of tax free income and keeping the valuable guaranteed annuity rate.

Grumpy_chap

The guaranteed annuity sounds attractive.

As Af1963 mentioned, it is worth drawing enough pension to use tax free allowances even if you don't need the funds.