LUmp sum or annuity

mucky1957

I am 66 early next year and my pensions comes due. I have a pension pot with Sun Life of canada and have the choice of taking the whole lot out or take an annuity.

I know that if I take the whole pot I get a certain amount tax free and then have to pay tax on the rest...but I get all the money and can decide what to do with it myself.

If I take out a percentage yearly ( via the annuity ) I am aware that once I die any money left in the pot can't be passed to my wife / family.

So..is there a way to decide what is the best thing to do...I realise that no one knows when their time is up so I could be around for another 20 years plus or be dead any time soon...

Dazed_and_C0nfused

There is usually a third option, drawdown although you may need to move provider if Sum Life don't support this for your pension.

You can take 25% TFLS upfront and then take the rest as taxable income when you want.

Or you can take payments when you want with each one being 25% TFLS and 75% taxable income.

There are likely other permutations but they are two basic ones outside of the annuity or taking it all in one go.

Also, DC pensions don't usually come due at a particular date, you often have plenty of flexibility when it comes to taking money out.

Millyonare

Agreed on "drawdown" above.

The final decision will depend on the pot size, the tax rate, and the annuity offer.

Regarding age -- the average UK healthy adjusted life expectancy (HALE) today is 70yo.

Dyor, etc.

Beddie

Have you had a consultation with Pension-wise? It's a free government service that is designed to explain your options. They don't give advice, but do explain things clearly.

Give them a try  https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

xylophone

I am 66 early next year 

Have you obtained a  state pension forecast?

https://www.gov.uk/check-state-pension

I have a pension pot with Sun Life of canada and have the choice of taking the whole lot out or take an annuity.

How much is in the pot?

Is this your only pension other than state pension?

Do you intend to retire from paid work next year?

JohnWinder

There are several significant financial risks or hazards in retirement, including, these days, being financially scammed through online fraud or an unsolicited phone call from a gentleman with a foreign accent.

But the ‘traditional’ hazards are: living too long and running out of money; inflation; and market risk (your investments lose money or don’t make enough). The nice thing about a good annuity is that it eliminates those risks for you (and the financially scammed risk too!) by handing the risks over to an insurance company that you buy the annuity from. As long as it’s a CPI indexed annuity.

The bit about deciding, yea or ney, comes down to how much money is involved compared to your spending needs. If you’ve got oodles of money that you’ll never spend, then longevity, inflation, and market troubles won’t affect you, so you don’t put the money into an annuity - rather, you retain flexibility in how you use it, and leave some for the kids.

If you have so little, that buying even the lowest cost annuity does not provide you with enough spending money, then similarly you don’t buy an annuity because it will leave you short of cash.

But if you are in the grey area between those two extremes, namely, just enough or comfortably more than enough to buy an annuity, but not so much as to be filthy rich, then an annuity is an option (and a good one if you like peace of mind and can’t be bothered managing your investments or paying someone to do so). Does that make sense?

mucky1957

Thanks all...

So the amount with Sun Life is aprox £40000 in total. I have other 'pots' / investments / shares etc and while money isn't tight I certainly won't be buying a brand new car anytime soon.

I intend to keep working a few days a week for a few more years hopefully ( Im a gardener so it's all down to how physically able I am )

I am aware of what my state pension will be come my 66th birthday and it is the full amount available. So the amount I get from working and my pension money will be more than enough to cover day to day expenses without me worrying..I am aware that I am lucky

The truth is the SLC money just sits there and doesn't do anything. I was thinking of taking it out and investing in ISA's or more shares.

I am aware that the first 25% is tax free...can I take 25% tax free each year or is it just a one-off option and if that is the case how much tax would I have to pay on the 75% ( aprox £30000 )

Am I right about one thing..if I agree to the annuity then that cannot be changed and that the money only lasts while I am alive?

Finally...thanks to MILLYONARE...that just ruined my day...I hope to go on long past 70....

Dazed_and_C0nfused

The truth is the SLC money just sits there and doesn't do anything. I was thinking of taking it out and investing in ISA's or more shares.

I am aware that the first 25% is tax free...can I take 25% tax free each year or is it just a one-off option and if that is the case how much tax would I have to pay on the 75% ( aprox £30000 )

Am I right about one thing..if I agree to the annuity then that cannot be changed and that the money only lasts while I am alive

Why would you want to take it out of the pension, pay some tax on it and reinvest it?

Couldn't you achieve the same thing by changing your investment choices within the pension wrapper, transferring it to another provider if necessary to get the preferred investments?

The 25% TFLS is dependent on your choices.  You could take it all in one go upfront.  But that crystallises the whole pot so if the remaining taxable element of £30k grew to say £50k the whole £50k is taxable.

Or you could take payments where 25% of each one is a TFLS.

Buying an annuity is usually irreversible (there may be niche scenarios where it's possible but I suspect few or none).  If you take a look at the MSE Pensions forum you'll see annuities are starting to be considered a viable option again for some people after being out of favour for some time.

This might be worth a read as it covers pension flexibilities and tax.

https://www.google.com/url?sa=t&source=web&rct=j&url=https://taxvol.org.uk/index.php/bfd_download/a-guide-to-pension-flexibility-and-taxation-22-23/&ved=2ahUKEwjkppDtrdr6AhVjSkEAHQJMBEIQFnoECD0QAQ&usg=AOvVaw0-Wy766h-pn9yMTQLVon21

Millyonare

The 70yo reference is a positive thing. Info is power.

For me, I'd be spending the £40k on travelling the world with the wife for the next 2 or 3 years. We could probably visit and tour 20 or 30 new countries (maybe more).

dunstonh

The truth is the SLC money just sits there and doesn't do anything. I was thinking of taking it out and investing in ISA's or more shares.

That is not the truth.  

The SLFoC pension is invested in funds and you get the performance of that fund.  To withdraw it from the pension to invest in a different tax wrapper, such as ISA, would be silly.  You would be paying tax for no reason and putting it in a less tax efficient wrapper (pension wrapper beats ISA wrapper).   If you feel the SLFoC pension doesn't offer the investments you wish to utilise then transfer it to a pension that does.

I am aware that the first 25% is tax free...can I take 25% tax free each year or is it just a one-off option and if that is the case how much tax would I have to pay on the 75% ( aprox £30000 )

You only get the 25% once.  The 75% would be added to your income and taxed at the appropriate income tax levels.

Am I right about one thing..if I agree to the annuity then that cannot be changed and that the money only lasts while I am alive?

Lifetime annuities are cast in stone once set up.    Death benefits will depend on the options you select when setting it up.  For example, 100% spouse will continue in full for both of your lives.   Or value protect will return the initial capital minus payments.  Or you can guarantee up to 30 years of income payments as a minimum.