Asked to purchase an immediate annuity at age 55 but option 1 or option 2 ? Advise needed please !

s2020x

I recently asked my employer for an early retirement aged 55 quote for my pension. I am 53 years old and looking to retire at 55. Note - Checking the HMRC website, I have paid enough years for a full pension at 67 or 68 (if government bring it in early)

 The company came back with 2 quotes:

Option 1 – reduced DB pension £8774 per year (or £731 per month). I also have a DC fund £450,000. They say that 25% must be taken as a Pension Commencement Lump Sum and 75% taken as an IMMEDIATE ANNUITY. Lump Sum therefore would be £112,000 and the 75% DC pension residue would be £337,000 approx.

I have checked online and can get a joint life annuity guaranteed 30 years, at £1390 per month on this DC residue for this option 1. (no increases per year)

Summary – 731 + 1390 = £2121 per month before tax (aged 55 to 68) plus £112,000 lump sum. At 68, the state pension would add about £1000 per month taking it to £3100pm.

 

Option 2 – more reduced DB pension £7602 per year (or £633 per month). The maximum Pension Commencement Lump Sum offered is £157,000 and a £319,000 DC pension residue to be taken as an IMMEDIATE ANNUITY.

I have checked online and at age 55, can get a joint life annuity guaranteed 30 years, £1320 per month for the residue on this option 2. (again no increase)

Summary – 633 + 1350 = £1983 per month before tax (aged 55 to 68) plus £157,000 lump sum. At 68, the state pension would add about £1000 per month taking it to £3000pm.

 

I don’t have any debts and kids are all grown up.  I normally spend about £1900 per month so both options meet that. I did ask my employer about drawdown pensions but the company pension rules for my specific pension does not permit that. I will come back on drawdowns in a separate thread.

 I have a couple of questions:

Which do you think is the best of the above 2 options ?

 

Can anybody advise on what to do with the lump sum in option 1 or  2 over the 13 years aged 55 to 68. 13 years is 156 months and 157K is like £1000 per month paid to yourself for 13 years (or £700 for option1). Reading around, am I permitted to buy a 13 year fixed term annuity taking me from 55 to 68 paying me monthly amount before the state pension kicks in? Is that the best way rather than just sitting in the bank paying yourself £1000 or £700 ?

Thanks.

Pat38493

Do you want to take an annuity from your DC pension?  If not, you should check whether you can transfer the DC fund to a different type of pension or a different provider in order to provide more options for how to take the money.

Older DC pensions sometimes insist that you take an annuity from your taxable part, but i believe that in most cases you can simply transfer the whole pot to somewhere else where you will have the full range of possibilities (flexi access drawdown etc). 

Marcon

s2020x said:

I recently asked my employer for an early retirement aged 55 quote for my pension. I am 53 years old and looking to retire at 55. Note - Checking the HMRC website, I have paid enough years for a full pension at 67 or 68 (if government bring it in early)

 The company came back with 2 quotes:

Option 1 – reduced DB pension £8774 per year (or £731 per month). I also have a DC fund £450,000. They say that 25% must be taken as a Pension Commencement Lump Sum and 75% taken as an IMMEDIATE ANNUITY. Lump Sum therefore would be £112,000 and the 75% DC pension residue would be £337,000 approx.

I have checked online and can get a joint life annuity guaranteed 30 years, at £1390 per month on this DC residue for this option 1. (no increases per year)

Summary – 731 + 1390 = £2121 per month before tax (aged 55 to 68) plus £112,000 lump sum. At 68, the state pension would add about £1000 per month taking it to £3100pm.

 

Option 2 – more reduced DB pension £7602 per year (or £633 per month). The maximum Pension Commencement Lump Sum offered is £157,000 and a £319,000 DC pension residue to be taken as an IMMEDIATE ANNUITY.

I have checked online and at age 55, can get a joint life annuity guaranteed 30 years, £1320 per month for the residue on this option 2. (again no increase)

Summary – 633 + 1350 = £1983 per month before tax (aged 55 to 68) plus £157,000 lump sum. At 68, the state pension would add about £1000 per month taking it to £3000pm.

 

I don’t have any debts and kids are all grown up.  I normally spend about £1900 per month so both options meet that. I did ask my employer about drawdown pensions but the company pension rules for my specific pension does not permit that. I will come back on drawdowns in a separate thread.

 I have a couple of questions:

Which do you think is the best of the above 2 options ?

 

Can anybody advise on what to do with the lump sum in option 1 or  2 over the 13 years aged 55 to 68. 13 years is 156 months and 157K is like £1000 per month paid to yourself for 13 years (or £700 for option1). Reading around, am I permitted to buy a 13 year fixed term annuity taking me from 55 to 68 paying me monthly amount before the state pension kicks in? Is that the best way rather than just sitting in the bank paying yourself £1000 or £700 ?

Thanks.

You are currently limited by the rules of your employer's pension scheme, both DB and DC.

Given you are still several years away from being able to access either of these, taking some proper professional advice (the sort you pay for!) is likely to be the best option by far, since transferring to a more flexible alternative (at least in respect of the DC savings) might be well worth considering. 

Also bear in mind that annuity rates could be very different by the time you get to age 55, so quotes obtained now may not be anything like accurate when the time comes.

JohnWinder

Would you like to face a firing squad with three quarters of the guns loaded, or only half of them loaded? Is there no alternative to a fixed value annuity? Inflation is the scourge of retirement funding, along with longevity and market volatility. UK inflation has been 30% in the last 10 years; every time a new figure is announced it’s another little, or big, kick in the teeth if you’ve still got any left at that age.
In the meantime you and I need to read up on the time value of money, and how to do future value calculations.

Secret2ndAccount

Statistically, mathematically, perhaps Option A is a fraction better, but the difference really is minimal.  I would lean towards option B. You will have a lot of fixed monthly income, especially once the SP kicks in. Option B gives you more cash in case you need a surgery / roof / car / holiday outside your monthly spending pattern.
Pick your number for a cash emergency fund, then invest the rest, preferably in a low cost equity tracker. Invest to the highest level of risk you are comfortable with. You don't need this money for food, so you should be able to hold your nerve and stay invested if equities take a temporary nosedive. 100% equities should give the best long term return.
Or think shorter term and spend some of it. You can't take it with you.

dunstonh

I don’t have any debts and kids are all grown up.  I normally spend about £1900 per month so both options meet that. I did ask my employer about drawdown pensions but the company pension rules for my specific pension does not permit that. I will come back on drawdowns in a separate thread.

most occupational schemes do not allow drawdown but you would just transfer the DC scheme to one that does.

Which do you think is the best of the above 2 options ?

I wouldn't want to say as option 3 would be a quote from an IFA and model it to suit your needs rather than picking two options and asking which is best when neither may be.

Reading around, am I permitted to buy a 13 year fixed term annuity taking me from 55 to 68 paying me monthly amount before the state pension kicks in? Is that the best way rather than just sitting in the bank paying yourself £1000 or £700 ?

What would your plan be in 13 years time?
Why would the alternative be "just sitting in the bank"?    What about all the other options?

At the moment, you have mentioned a handful of hypothetical solutions.    However, solutions should be selected to fit your objectives.    You shouldn't compare solutions and ask which is best without knowing the objectives.

Albermarle

I would go back to the employer and ask instead of either option, can you transfer the DC portion away to another provider. The answer will be helpful in knowing what your best options might be in future.

s2020x

Wow.

Thanks for the replies from the forum experts. Each reply is really appreciated. To cover all the points, I have also spoke to my employer many times. As said, its either option 1 or 2 due to the rules of my pension. No flex. I have to get an immediate annuity. I am ok with this.

So, my objective is to get the maximum monthly income I can so I can do things like go on a one or two holidays every year as my son lives in America and my other family are based in New Zealand and Australia.

I was also leaning towards option 2 as well because I would effectively get £3,000 per month for the rest of my life.  How? According to my calculations ….

Age 55 – 68 …. payment would be DB £633 + ANNUITY £1320 + LUMP £157000/156 months = £1000 . Total = £3000 per month.

Age 68 onwards, state pension would replace the lump sum and would also be around £1000pm. So, with the the same figures above for DB and Annuity, Total would continue to be £3000 per month. Obviously DB and state pension would rise each year, so would get a bit more.

So, for me, 3K a month for rest of your life is a huge amount. I’ve never had that amount of money before. There would be no worries.  Whilst I am not as knowledgable as the kind people that have replied, most are focussing on the drawdown option that isnt available to me.

 

But this begs the question .... would drawdown be better than 3K per month? My colleague told me that I would definitely have less money every month, there would be a risk that it could run out before reaching 80, and there would be significantly more costs/charges totalling upto 2% annually of my pot which would be £9k for me every year. (costs included FA setting it up, then insurance company annual management fee on the pot, annual investment fee charges plus administration charge). But the forum of experts will know if a 450K pot can deliver similar income, less, maybe better, and whether it is worth the stress when investments go down like during covid.

Thanks again!

Pat38493

Question to other forum experts - isn't it somehow illegal to refuse to allow any option to transfer a DC type pension out?  Not withstanding that there could be a financial advice requirement if there are protected benefits? 

If so, wouldn't that mean that the employer or scheme cannot completely block the OP from transferring out?

OP, who is your employer and what is the name of the scheme?  Only exception would be if it's a public service pension and maybe what you are referring to as DC is some kind of AVC linked to the public service pension.  You imply that in the two scenarios, the DC amount is somehow affected by the DB pension so I guess this is some kind of hybrid pension.

Even in this case, I would have thought that you could still transfer out the entire thing based on CETV valuations with financial advice (at least in theory if not so easy in practice), as this would be necessary to be able to do for example in the case of divorce.

As regards the annuity - 3K per month might be a lot now but in the first post you mention that some of it is  not inflation linked - you would be surprised how quickly that will be eroded by inflation over a retirement timespan.  You might want to do some calculations about that to see if you are happy with it.

Albermarle

When you drawdown there is a concept/theory of a safe withdrawal rate ( SWR) . It is based on there being only a very small chance of your pot running out before you are 90/95, based on historical statistics. The likelihood is that you would die still with a big pot ( to pass on)
This rate at age 55 is about 3% , so £13,500 pa.
However and this is a very important point, this calculation takes into account that it will increase with inflation every year.
I think the figures you quoted were for a level annuity ie not increasing with inflation. Over 30 or 40 years inflation could destroy the value of the annuity income. 
So maybe you had better get some quotes for inflation linked annuities to get a better comparison.

xylophone

 would drawdown be better than 3K per month? 

But have you not stated that the drawdown option is not available to you as the rules of your scheme require that you take an immediate annuity from the DC portion?

Then what is the point of worrying about drawdown?