Fixed Term Annuity - Use Part of Drawdown, Or The Whole Hog in This Product?

Albermarle

Yes, I was told “not” by my IFA which is why he wants to keep it (somehow, and not yet exactly sure just yet) inside a tax free investment product

I would guess he is thinking about something more complicated than the types of products we usually discuss on this forum. I would examine the detail very carefully. Personally I would rather stick to mainstream relatively simple products and pay some tax, than invest in something I did not really understand properly.

Trapdoor

I’ve had some info back from my IFA.

For the TF 25% from my SIPP he is recommending an ‘onshore bond’ where you are able to take 5% of the initial investment per year (for 20 years) as a tax deferred withdrawal (whatever that means)

I’m still not completely convinced as I don’t believe I’ll be able to draw as much from this as if it was invested completely in the annuity product, but then I’d have to pay tax … so I have to try and understand which is the least risk averse and safe plan that isn’t going to cost me more 5 years down the line.

LHW99

Trapdoor said:

I’ve had some info back from my IFA.

For the TF 25% from my SIPP he is recommending an ‘onshore bond’ where you are able to take 5% of the initial investment per year (for 20 years) as a tax deferred withdrawal (whatever that means)

I’m still not completely convinced as I don’t believe I’ll be able to draw as much from this as if it was invested completely in the annuity product, but then I’d have to pay tax … so I have to try and understand which is the least risk averse and safe plan that isn’t going to cost me more 5 years down the line.

That sounds rather like the bonds my parents-in-law were sold some years back by an FA (not independent) which paid a few years income, before they had to stop because it was depleting the capital value. There was something called "top slicing relief" (I think) which meant that if you only took out a small proportion of the total each year you didn't pay tax.

You could also consider putting the maximum for yourself & your wife into premium bonds (2 x £50k I think) which are tax-free and would earn a small amount of payback on average, with a chance of a lot more, while you wait to fill ISAs

Trapdoor

LHW99 said:

That sounds rather like the bonds my parents-in-law were sold some years back by an FA (not independent) which paid a few years income, before they had to stop because it was depleting the capital value. There was something called "top slicing relief" (I think) which meant that if you only took out a small proportion of the total each year you didn't pay tax.

You could also consider putting the maximum for yourself & your wife into premium bonds (2 x £50k I think) which are tax-free and would earn a small amount of payback on average, with a chance of a lot more, while you wait to fill ISAs

The income % to be taken from the bond should not deplete the capital … that’s the plan anyway. 

I have maximum PB holding and sadly my wife passed away from cancer in 2019 so I have no additional allowances such as ISA or PBs to stash the tax free cash into. PBs are pretty dire anyway, perhaps I’m just unlucky (I tend to think I am after the situation I’m in now post-2019 ☹️) but the past 3 months with £50k holding I’ve had zero wins and 6 months of the past 12 have been zero wins.

I pay the IFA enough in fees that I expect him to come up with a workable and legal (%under the current tax rules) plan.

Malthusian

Trapdoor said:

Well, the subject of the tax free element cropped up because my original IFA had given me duff info … he asserted that the annuity company would basically split the income from the annuity into taxable and tax free payments … this was wrong, and it was clear that if the whole pot is used to purchase the annuity then all the income is taxable … so you gain nothing at all from the TFLS.

I wonder if he was actually talking about drawing the TFLS and using it to buy a "purchase life annuity", which is partially tax free (deemed your own money being paid back to you) and partially taxable as income.

Yes, I was told “not” by my IFA which is why he wants to keep it (somehow, and not yet exactly sure just yet) inside a tax free investment product.

Onshore bonds aren't tax free. They are subject to basic rate tax on income and gains within the bond. When there is a "chargeable event" (like withdrawing money in excess of the 5%pa allowance), you can be liable for further tax if the gain on the bond is deemed to take you into the higher rate tax bracket or above. The rules of this calculation are complicated and full of traps.
For many people an "unwrapped" account is more tax-efficient, unless they are higher rate taxpayers aiming to defer the full tax liability until a later date when they - or a beneficiary - will be in a lower tax bracket.

It may be that eventually I’m not too bothered … my preference would have been to have this in an ISA. It’s a real shame that there is no mechanism to transfer the TFLS  into an ISA in the same way ISA to ISA transfers are allowed.

The default way to shelter tax-free cash from tax on income and gains is to not take it out of the pension in the first place. Unfortunately, if you want to use the taxable 75% of the pension to buy an annuity (fixed term or otherwise), you run up against the problem that the TFLS is more properly called a "pension commencement lump sum" and has to be taken when you commence your pension (the fixed term annuity in this case), otherwise the ability to do so is lost.

The income % to be taken from the bond should not deplete the capital … that’s the plan anyway. 

Any withdrawal % will deplete the capital. You are just hoping that capital growth over time will increase the value faster than it is depleted, which is not guaranteed.

GSP

Trapdoor said:

The income % to be taken from the bond should not deplete the capital … that’s the plan anyway. 

I have maximum PB holding and sadly my wife passed away from cancer in 2019 so I have no additional allowances such as ISA or PBs to stash the tax free cash into. PBs are pretty dire anyway, perhaps I’m just unlucky (I tend to think I am after the situation I’m in now post-2019 ☹️) but the past 3 months with £50k holding I’ve had zero wins and 6 months of the past 12 have been zero wins.

I pay the IFA enough in fees that I expect him to come up with a workable and legal (%under the current tax rules) plan.

If okay, I thought I would let you know how our meeting went today with our IFA Trapdoor, and for others too if interested 😀.

I brought a few papers along with us with a prepared number of scenarios with different fixed term annuity’s and guaranteed amounts, alongside drawdown’s etc.

As we walked in, I could also see a couple of papers the IFA had prepared, but was a little surprised as these were for Lifetime Annuity’s. The IFA said more clients had been more active in this product recently. But he did go through a scenario on screen, put joint life in and inflation linked and the return had halved.
I did say this would not be any good for us in the short term at the very least, and we would struggle.

It was a good discussion though, and I went through my figures for FTA’s. Seeing these actual numbers from a yearly income, over fixed terms, along with a guaranteed sum received back gave me more certainty anyway.

The IFA realised our aims probably better there and then while discussing at this granular level. We are not interested in growing pots, just protecting and making sure our funds last alongside our state pensions until we die was our main goal, whilst also trying to enjoy the money as best if we could.

We left it he will run a FTA v Lifetime Annuity scenario, I don’t know what for to be honest though.

But I would say after the discussion the odds are we will take all the tax free out of my fund, and put the rest in a five year term FTA. My OH will keep her drawdown, taking out her personal allowance tax free and will take approx c£4k out of the uncrystallised to crystallise c£12k to enable the personal allowance element to be taken.

In the meantime, I’ll be withdrawing the last of the cash from my pension fund in the next two weeks, so if rates stay much the same it’ll make sense to make the switch into the FTA.

While we firm up on an action plan, the next inflation rate is due out 17th October, and the next BoE decision is on 2nd November. I’ll be keeping a close eye on the inflation rate, as that is likely to influence the BoE, so some quick action may be needed to get the annuity in place.

Edit: I just checked my IFA’s fees paper when I joined him. Under Pension Annuity it says £2k fee for every £100k. My 5 year fixed term annuity maybe for £585k, so getting on the £12k in fees!
Now, it says Pension Annuity, so whether lifetime and fixed term come under the same umbrella? I’m hoping that if I took this product out, in 5 years I will be back again to sort out the next step. I can’t imagine paying another £12k if I decided to take out another 5 year FTA. 

My OH will still have a drawdown fund, so our relationship with him will still be there.

BoxerfanUK

Wow 12K for setting up an FTA  These guys really have it sewn up!

wjr4

GSP said:

Edit: I just checked my IFA’s fees paper when I joined him. Under Pension Annuity it says £2k fee for every £100k. My 5 year fixed term annuity maybe for £585k, so getting on the £12k in fees!
Now, it says Pension Annuity, so whether lifetime and fixed term come under the same umbrella? I’m hoping that if I took this product out, in 5 years I will be back again to sort out the next step. I can’t imagine paying another £12k if I decided to take out another 5 year FTA. 

My OH will still have a drawdown fund, so our relationship with him will still be there.

The fees should be laid out very clearly. Did they write a suitability letter for you or was this just a chat again? There is no way they should be charging £12k

wjr4

Trapdoor said:

I’ve had some info back from my IFA.

For the TF 25% from my SIPP he is recommending an ‘onshore bond’ where you are able to take 5% of the initial investment per year (for 20 years) as a tax deferred withdrawal (whatever that means)

I’m still not completely convinced as I don’t believe I’ll be able to draw as much from this as if it was invested completely in the annuity product, but then I’d have to pay tax … so I have to try and understand which is the least risk averse and safe plan that isn’t going to cost me more 5 years down the line.

Are these definitely IFAs and not St James’ Place?

GSP

wjr4 said:

GSP said:t

Edit: I just checked my IFA’s fees paper when I joined him. Under Pension Annuity it says £2k fee for every £100k. My 5 year fixed term annuity maybe for £585k, so getting on the £12k in fees!
Now, it says Pension Annuity, so whether lifetime and fixed term come under the same umbrella? I’m hoping that if I took this product out, in 5 years I will be back again to sort out the next step. I can’t imagine paying another £12k if I decided to take out another 5 year FTA. 

My OH will still have a drawdown fund, so our relationship with him will still be there.

The fees should be laid out very clearly. Did they write a suitability letter for you or was this just a chat again? There is no way they should be charging £12k

It was just initial chat at this stage with a plan still to be finalised. We did not discuss fees at all. Under his fees section, it just says “Pension Annuity”., with fees to tranches of amounts set out.
Now, whether there is an argument/discussion to be had around different annuity’s. A lifetime annuity basically ends the relationship between the client and an IFA once it begins.
To me anyway a Fixed Term Annuity is a bit different as the relationship is likely to be rekindled towards it’s term maturity, and decisions will need to be made from there.
Again, my OH will continue with her drawdown, so let’s see what he proposes regards to fees for the FTA.
If he stands by his fees figure, I do wonder what a reasonable figure should be if people suggest this is too high?