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Taking the plunge

I am single, no dependants, own my home valued at £200K and I'm 63 years old. 

My holdings are as follows:

Royal London £205k (Governed Portfolio 2) 
A J Bell £190k (Vanguard Life Strategy Equity Fund)
Vanguard £30k (S&P500)
Scottish Widows £120k 
Easy access cash account £60k 
Qualify for full state pension
I have been advised to put £100k in a fixed term annuity for 3 or 5 years at 5.8%. Also, to use tax free cash from Scottish Widows to top up my easy access cash account to £100k to fund the next 4 years until state pension is due. 

Do you think this is making optimum use of my investments? 
Thanks 


Comments

  • How how much do you want to live on a year?
    Are you happy sorting things yourself or would you prefer the certainty of an annuity?
    Do you have any DB pension to come?
  • Thanks. I have been living reasonably well on £25k for a couple of years to see if it was manageable. No DB to come sadly. I am using an advisor rather than self planning. the appeal of an annuity is the good returns at the moment. 
  • Robin9
    Robin9 Posts: 12,473 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Alicante6 said:
    Thanks. I have been living reasonably well on £25k for a couple of years to see if it was manageable. No DB to come sadly. I am using an advisor rather than self planning. the appeal of an annuity is the good returns at the moment. 
    What is your income after tax at the moment ?  Presumably over £25k and you are saving this excess
    Never pay on an estimated bill. Always read and understand your bill
  • £2100 and yes, saving the excess, but thinking about finishing work 
  • I'm confused about this annuity. Presumably they give you the 100k back after the term ends? But if you've used pension funds to buy the annuity, what then happens to the 100k? Or are you using cash to buy the annuity, in which case where does it come from? It's not great to cash in all of your 25% tax free as you end up paying more tax later.
    If the 5.8% were inflation linked it would be a good deal. If it's 5.8% fixed, it's nothing special. You can get more by putting the money in a long term savings account. 
    You appear to have just about enough to retire:
    4 years at 25k = 100k. Say 120k to allow for inflation. Can probably avoid tax
    That leaves you with 500k from State Pension Age. 3% of that is 15k/yr. 3% should be okay for a 67 year old. You might be able to buy an annuity at >3% index linked at age 67. Add in the SP and you have your 25k. But that's before tax. It's mostly going to be taxable though (all your money is in pensions). Leaves you 2k short. 
    So, if you really want to retire, it looks like you could cut your cloth accordingly. If you are invested for some growth, it could all work out well with no need to cut back. If investment returns are poor, you might need to cut back a bit.
    If you retire, start drawing from (at least) one of your pensions from April: take 12570 taxable income so you pay no tax, but get some money out of the pension which would have been taxable if you left it until later. This preserves some of the tax free 25% so that it can grow with the pensions.

  • Great food for thought thanks. Note the annuity would be bought with pension funds and would come back to me at the end of the term. You confirmed by thoughts on a annuity v a high interest cash account
  • But would it be bought with tax free lump sum from the pension, or with taxable money from the pension? Typically, you would get a 33k lump sum (that's 25%) and the other 75% taxable part would go to buy the annuity. The annuity income would be taxable (because it's basically interest) although, if retired, you could likely avoid paying tax on it, at least until you got your State Pension. Problem is that the return of funds to you would then be like a withdrawal from a pension. 100k in one year would generate a large tax bill. I stand to be corrected, but I very much doubt that just going in and out of an annuity would make taxable money suddenly tax free.
    If you are using tax free lump sum to purchase the annuity, then those problems go away, but there are still two points to think about:
    1. It's usually suboptimal to crystallise your entire pension (or most of) up front. It leads to you paying more tax later on.
    2. The rates from annuities purchased with cash, or TFLS are usually not as good as can be found for pension money: it's a less common product.

  • Marcon
    Marcon Posts: 12,963 Forumite
    Eighth Anniversary 10,000 Posts Name Dropper Combo Breaker
    Alicante6 said:
    I am single, no dependants, own my home valued at £200K and I'm 63 years old. 

    My holdings are as follows:

    Royal London £205k (Governed Portfolio 2) 
    A J Bell £190k (Vanguard Life Strategy Equity Fund)
    Vanguard £30k (S&P500)
    Scottish Widows £120k 
    Easy access cash account £60k 
    Qualify for full state pension
    I have been advised to put £100k in a fixed term annuity for 3 or 5 years at 5.8%. Also, to use tax free cash from Scottish Widows to top up my easy access cash account to £100k to fund the next 4 years until state pension is due. 

    Do you think this is making optimum use of my investments? 
    Thanks 


    As you're using an adviser, one hopes they can explain to you whether or not you are making optimum use of your investments within the parameters you see as important. In the absence of any information about your priorities, risk appetite etc, it's impossible to comment with any real insight.Alicante6 said:
    Great food for thought thanks. Note the annuity would be bought with pension funds and would come back to me at the end of the term. 
    You'd get a lump sum at the end of the term but it may not be your original investment. Have you checked?

    But would it be bought with tax free lump sum from the pension, or with taxable money from the pension? Typically, you would get a 33k lump sum (that's 25%) and the other 75% taxable part would go to buy the annuity. The annuity income would be taxable (because it's basically interest) although, if retired, you could likely avoid paying tax on it, at least until you got your State Pension. Problem is that the return of funds to you would then be like a withdrawal from a pension. 100k in one year would generate a large tax bill. I stand to be corrected, but I very much doubt that just going in and out of an annuity would make taxable money suddenly tax free.


    Correct. It wouldn't.


    2. The rates from annuities purchased with cash, or TFLS are usually not as good as can be found for pension money: it's a less common product.

    ...but the tax treatment is better, because part of the income from the annuity is treated as return of capital, so isn't taxed.


    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
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