Pension and pension options

CaptainWales

I am hoping to retire at 55 and have a pension pot of circa £500k by that time. I've had a look at annuities available if I retired today, and I could potentially get about £20k per year if I did that. 

That then got me thinking that I would need to live at least 25 years after retiring to make having a pension worthwhile (£500k / £20k = 25years). By that time I would be 80. What I'm thinking though is in that time the chances of me dying increase (I'm getting older by the day) - so if I die having bought an annuity, does that mean the chances of me actually getting what I put in back is quite low? Surely that can't be right?

I'm sure cleverer people than me will correct my thinking here! 

Silvertabby

Such is the way of DB and annuity pensions - those who die early help to pay for the pensions of those who live to 90+.

Pensions would be even more unaffordable otherwise.

artyboy

Is that an annuity that pays a flat £20k with no rises, or is it inflation linked, or have spousal/dependent benefits? Because it's those things that provide a level of security that makes annuities worth it to some people.

dunstonh

That then got me thinking that I would need to live at least 25 years after retiring to make having a pension worthwhile (£500k / £20k = 25years).

Half of people will get to late 80s and a quarter to around age 94.  

 - so if I die having bought an annuity, does that mean the chances of me actually getting what I put in back is quite low?

Depends on what death guarantees you put in place for beneficiaries.
Also, you are underestimating likely life expectancy.

Surely that can't be right?

Annuities include mortality gain.  i.e. those dying early improve the annuity rate to offset those who die later.

However, many people concerned about a legacy typically use drawdown rather than annuity.

CaptainWales

The £20k was approx and including inflation. 

squirrelpie

https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

Roughly speaking, on average you get back what you put in (as long as you buy the best annuity on the market). In reality you'll get back slightly less because of admin costs and perhaps profit. But what each individual gets depends on how long they happen to live.

Silvertabby

Ah, that oft asked question of which pensions option would give them the best return.  My reply?  "Yes, I can work that out for you, as long as you are able to give me one vital piece of information.  Your date of death".  

CaptainWales

Let's say I have £500k though - if I put it into a pension then there will always be some restriction (and gamble as Idon't know when I will die), that I might never get anywhere near that amount back. With that in mind, I don't understand why people keep hold of the money? And either save, invest etc That way it's always accessible pre and post retirement date and you can leave as part of your estate.

Albermarle

CaptainWales said:

Let's say I have £500k though - if I put it into a pension then there will always be some restriction (and gamble as Idon't know when I will die), that I might never get anywhere near that amount back. With that in mind, I don't understand why people keep hold of the money? And either save, invest etc That way it's always accessible pre and post retirement date and you can leave as part of your estate.

You can not just put £500K into a pension.
Do you mean buy an annuity with £500K ?

Otherwise adding contributions to a pension attracts tax relief and the money invested in within the pension is sheltered from tax on gains. Also you can leave it as an inheritance.

Kernowshep

Is your question why do people save money in a pension?

Primarily, for it's tax benefits (e.g. you save tax at the time you invest, often at a higher rate than you will pay when you withdraw it, including 25% tax fee, plus sometimes it means you continue to receive other income like child benefit etc. and it also has the ability to be passed on free of IHT).

In some cases putting salary into the pension (especially via salary sacrifice) more than doubles the effective amount that you have. eg. saving 30/42/47% tax & NI, plus 13.8% employer NI contribution, plus any further employer contribution 3%+ of salary.  Pension saving makes even more financial sense at certain thresholds like about £50-60k re child benefit and £100-125k personal allowance tapering.

You don't have to purchase an annuity (using the full amount in the pension), if you don't, it means you could potentially keep the majority of the capital and use the yield as an income, and whenever you die pass on the rest free of IHT.  If not purchasing an annuity you do have to decide what to invest it in though, and it could rise or fall in value depending on what you invest in. Some people use an annuity to cover a fix proportion of what income they think they will need, and keep the rest of their pension savings more flexibly.

At 56 (later to be 57 or 58) you can access it all straight away, paying tax at your marginal rate - hence why it usually makes more sense to spread out what you take so you pay less tax.

You can invest in a lot of the same things inside or outside of the pension but in a lot of cases you'd pay tax on the gains and wouldn't have the initial tax saving.  With ISA's you have already paid the tax, before you pay it in, but don't pay any when you take it out.  There are limits on how much you can pay into both an ISA and a Pension each year.

Obviously if you need money now or before 56/57/58 then you need to fund that from elsewhere than a pension.

CaptainWales

I meant put £500k in over the course of my lifetime. Not a lumpsum.

Can you leave a pension in theory to anybody? You say that it can be passed on free from IHT but is that only if you leave to a spouse?