Maximising pension, taking early annuity - what am I missing?

SulaBassana

I am 52 and a self-employed single Mum. I have some savings, so I am not eligible for Universal Credit etc were I to be unable to work - instead I would have to burn through these savings first. 

So I would like to create some passive income as a back-up, and so that I can also choose more interesting work and take occasional breaks etc without the constant pressure to earn.

If I am understanding the rules correctly, I could do the following:

1) pile savings and any spare earnings into my pension for the next few years with a similar amount each year.  (This should be at least for 3 years, so I do not trigger an investigation.) I would aim for £100k

When I decide to take an early annuity of 4-5K ish (maybe at 56, but hopefully when there is a decent rate).  I could then:

2) take back 25% tax free (which will effectively have had a 25% interest due to the Gov top up)

3) buy an annuity which would then pay out for the rest of my life (they don't seem to offer that much less per year when started earlier, which seems surprising) which would top up my wage and provide a cushion.  GIven the number of years this may be required (hopefully) taking an annuity early seems like a good deal.

4) continue to pay into another pension normally.  It looks like taking a ' tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases.' doesn't trigger the MPAA (£10k/y max) pension contribution allowance.  (But this would be moot for me anyway.)  I could in part use the 25% I took from the first pension.

What am I missing?

What would be better?  I am aware for example that if i would pay tax in retirement (as most of us will if we have any private pension given the current personal allowance) that ISAs are probably as good if not better (IMO) for retirement when there is a more limited timescale (e.g when starting to depend on it at say 67), so I might not pay more into the 'second pension'.

Any thoughts - and especially 'you've got that compeltely wrong's appreciated.

Thank you.  (And hello all).

Sula.

dunstonh

3) buy an annuity which would then pay out for the rest of my life (they don't seem to offer that much less per year when started earlier, which seems surprising) which would top up my wage and provide a cushion.  GIven the number of years this may be required (hopefully) taking an annuity early seems like a good deal.

57 will be minimum age for pension.

Annuity rates in your 50s will be very low  You would be looking at 2.x%-3.x% for index linked (you wouldn't want to buy level annuities in your 50s)

They wont give much as in your 50s, they are going to pay out a decade more than when they are normally taken.

4) continue to pay into another pension normally.  It looks like taking a ' tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases.' doesn't trigger the MPAA (£10k/y max) pension contribution allowance.  (But this would be moot for me anyway.)  I could in part use the 25% I took from the first pension.

Commencing a pension income to only pay into another pension wouldn't seem a sensible thing to do.

  I am aware for example that if i would pay tax in retirement (as most of us will if we have any private pension given the current personal allowance) that ISAs are probably as good if not better (IMO) for retirement when there is a more limited timescale (e.g when starting to depend on it at say 67), so I might not pay more into the 'second pension'.

That is not correct.  Pensions beat ISA.

Marcon

SulaBassana said:

If I am understanding the rules correctly, I could do the following:

1) pile savings and any spare earnings into my pension for the next few years with a similar amount each year.  (This should be at least for 3 years, so I do not trigger an investigation.) I would aim for £100k

You would be subject to the normal limits for tax-relievable contributions, so if you are paying into a personal pension, you could pay in an amount of up to 80% of your self-employed earnings/profits and the pension provider would claim basic rate tax relief on your behalf and add it to your 'pot'. Maximum is £60K a year including tax relief, unless you have 'carry forward' from previous years available AND your earnings in the tax year when you make the contribution are at least equal to what you want to contribute. https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

Why would it trigger an investigation/why do you need to pay in for 'at least 3 years' - are you confusing this with pension recycling, where someone takes tax free cash from their pension with the deliberate intention of reinvesting it into another pension and getting a second helping of tax relief?

SulaBassana said:

I am 52 

When I decide to take an early annuity of 4-5K ish (maybe at 56, but hopefully when there is a decent rate). 

The current minimum age for accessing your pension is normally 55. It rises to 57 on 6 April 2028. There are currently no transitional provisions, so you may be one of those caught by the 'cliff edge' change from 55 to 57.

rjmachin

Marcon said:

The current minimum age for accessing your pension is normally 55. It rises to 57 on 6 April 2028. There are currently no transitional provisions, so you may be one of those caught by the 'cliff edge' change from 55 to 57.

Sorry for the slightly off-topic question.   If you turned 55 before the change date (6 April 2028), so for example 1 December 2027 and commenced a drawdown before 6 April 2028, will you be allowed to continue after that date, or will withdrawals be paused until your 57th birthday?

MallyGirl

rjmachin said:

Marcon said:

The current minimum age for accessing your pension is normally 55. It rises to 57 on 6 April 2028. There are currently no transitional provisions, so you may be one of those caught by the 'cliff edge' change from 55 to 57.

Sorry for the slightly off-topic question.   If you turned 55 before the change date (6 April 2028), so for example 1 December 2027 and commenced a drawdown before 6 April 2028, will you be allowed to continue after that date, or will withdrawals be paused until your 57th birthday?

no one knows yet!

MallyGirl

will you have enough profit from your self employed business to support the level of contribution you are looking at?