Tax & Annuities

SSTJCKel

This could possibly be in the wrong board however :-

1) Firstly are benefits considered in your tax calculation after retirement ie I am able to retire later this year when I reach 66 years old. I have my state pension illustration. I also have DC pensions which I am still deciding what to do with. However the wording of some government and other websites seems to suggest that tax is calculated on total income no matter what the source is. So is the tax calculation based on 1 ) State Pension + Private pension income + Housing or other benefits paid by the state or is it only based on 2) State pension + Private pension.

2) Secondly I am looking at a number of options including variable drawdown. In this situation how do I declare my taxable income if I don’t know how much I will take out of my private pensions as drawdown each month or year.

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

4) Fourthly where is the best place to find the best annuity rates. I’ve read that IFAs can get better rates than if I set up the annuity myself but obviously that will cost significantly more because of the IFA fees. There is a comparison on MoneyHelper of Annuity returns which is fine and helpful but will an IFA be able to better these rates and at what cost so is there a comparison of annuity rates available through IFAs or is there a guide as to how much better an IFAs Annuity deals are so that I can decide if its worth paying an IFA.

 

Dazed_and_C0nfused

1.  Tax is calculated taking into account all taxable income.  Not all benefits are taxable.  For example housing benefit isn't taxable whilst Carer's Allowance is taxable.

https://www.gov.uk/income-tax/taxfree-and-taxable-state-benefits

2.  You don't tell anyone in advance for tax, the pension company provides HMRC with details each time a taxable payment is taken.  If you complete a Self Assessment return then you include the taxable payments (and any tax deducted) on your return.

I'd you mean for benefits purposes you might be better posting a separate thread on the Benefits board.

3.  No.  You have more flexibility than that 

4.  Others will no doubt post explaining how an IFA could potentially get you a better deal even after taking account of their fees.

MEM62

SSTJCKel said:

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

You do not have to put anything in a annuity.  I many cases drawdown is the better option.

dunstonh

 However the wording of some government and other websites seems to suggest that tax is calculated on total income no matter what the source is.

You need context with that statement.     Annuity income would be taxable under income tax.   State pension is paid gross but is taxable under income tax.

Income drawdown sees the 75% element subject to income tax but the 25% element is tax free, even when paid as a regular income.

2) Secondly I am looking at a number of options including variable drawdown. In this situation how do I declare my taxable income if I don’t know how much I will take out of my private pensions as drawdown each month or year.

Pensions fall under PAYE (annuity or drawdown).   You just need to monitor it in the same way you would do with employment income under PAYE.

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

In most cases, you would take the 25%.   With multiple schemes, you would use the transfer method (not open market option method)

4) Fourthly where is the best place to find the best annuity rates. I’ve read that IFAs can get better rates than if I set up the annuity myself but obviously that will cost significantly more because of the IFA fees. There is a comparison on MoneyHelper of Annuity returns which is fine and helpful but will an IFA be able to better these rates and at what cost so is there a comparison of annuity rates available through IFAs or is there a guide as to how much better an IFAs Annuity deals are so that I can decide if its worth paying an IFA.

Why do you think the IFA will cost significantly more?

If you buy without an IFA, the providers will pay the introducing website or their own sales force a commission.  That commission is factored into the annuity rate.    So, buying without an IFA can actually cost significantly more.

In general, the commissions are open ended with no capping or tiering.    Whereas many IFAs will have a fixed free option, capped fee or tiered fee.   So, the larger the pot, the more likely the IFA will get the better outcome.

In reality, the IFA you use doesn't matter if everything is equal.    The annuity rates used by IFAs are the nil commission rate.  So, the fee is the primary driver in differences.   However, if you have any medical conditions, this is where it differences can arise.  The quality of the information given will vary the rate.      If you give half hearted data to a non-advised website/introducer then they will just use that.  No questioning or trying to get more info.   A lazy IFA may do the same but a good IFA will dig deeper and look to encourage you for much more information.

Last year, when annuity rates were at their peak,  I had a client who had quotes online. He gave me the medical details he supplied and through a lot of hard work (he wasn't the most forthcoming with info) we got the annuity to over £2,000 a year higher than the figure given by the website.  

If he had filled in the information to the same level of quality, the website would have been in the same ballpark. 

The IFA is a facilitator for getting it right, doing it correctly and making sure the right type of annuity and the right options are selected.    DIY requires you to do similar.  If you do, then there may not be too much difference.  If you do not, then it can be costly for you if you don't get it right.

SSTJCKel

MEM62 said:

SSTJCKel said:

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

You do not have to put anything in a annuity.  I many cases drawdown is the better option.

Well here is one of the issues. I have £100k to put in an annuity. I used MoneyHelper to get quotes and and added in all the info about my health and that says I could get over £8k a year which is more than double the other quotes i've had in the past..... All the guidance i've read about drawdown is that you should aim to take 4% (ie £4k) a year. So on that basis the Annuity is obviously looking better.... Having said that I have read that an IFA can get better annuity rates than me doing it on my own but I would like to find out how much better?

dunstonh says that it depends on the IFA but that leads me to the problem of how to pick the right IFA. I know how to find IFAs but how do I find the 'RIGHT' one that can maximise my income. That being said of course I don't know how accurate the Money Helper quotes are of course.

The whole thing seems a bit of a lottery (which is something I have never won !).

Dazed_and_C0nfused

SSTJCKel said:

MEM62 said:

SSTJCKel said:

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

You do not have to put anything in a annuity.  I many cases drawdown is the better option.

Well here is one of the issues. I have £100k to put in an annuity. I used MoneyHelper to get quotes and and added in all the info about my health and that says I could get over £8k a year which is more than double the other quotes i've had in the past..... All the guidance i've read about drawdown is that you should aim to take 4% (ie £4k) a year. So on that basis the Annuity is obviously looking better.... Having said that I have read that an IFA can get better annuity rates than me doing it on my own but I would like to find out how much better?

dunstonh says that it depends on the IFA but that leads me to the problem of how to pick the right IFA. I know how to find IFAs but how do I find the 'RIGHT' one that can maximise my income. That being said of course I don't know how accurate the Money Helper quotes are of course.

The whole thing seems a bit of a lottery (which is something I have never won !).

An annuity may be the best option but don't forget that you are buying that so have spent all your capital.

With drawdown you are taking some of your fund (and hopefully growth) each year but the remaining capital is still yours.

Qyburn

SSTJCKel said:

All the guidance i've read about drawdown is that you should aim to take 4% (ie £4k) a year. So on that basis the Annuity is obviously looking better.... 

To get a true comparison, in my opinion, you need to choose an RPI linked annuity, and if you're married (or equivalent) then include 100% surviving spouse pension. 

westv

SSTJCKel said:

MEM62 said:

SSTJCKel said:

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

You do not have to put anything in a annuity.  I many cases drawdown is the better option.

All the guidance i've read about drawdown is that you should aim to take 4% (ie £4k) a year. 

I'm not sure what guidance you've read but the guidance for the UK isn't 4%, it's somewhere between 3% and 3.5% or so. That guidance specifically says 4% could be too high.

MEM62

SSTJCKel said:

MEM62 said:

SSTJCKel said:

3) Thirdly do I have to put a complete pension into an annuity ie I have 4 DC pensions so could I put 75% of each into an annuity and take the other 25% as tax free cash.

You do not have to put anything in a annuity.  I many cases drawdown is the better option.

Well here is one of the issues. I have £100k to put in an annuity. I used MoneyHelper to get quotes and and added in all the info about my health and that says I could get over £8k a year which is more than double the other quotes i've had in the past..... All the guidance i've read about drawdown is that you should aim to take 4% (ie £4k) a year. So on that basis the Annuity is obviously looking better.... Having said that I have read that an IFA can get better annuity rates than me doing it on my own but I would like to find out how much better?

But the 4% isn't a fixed figure,  It's not cast in stone and is based on your pot funding an average life span.  If you are offered a higher annuity rate based on your medical info that suggests that your life expectancy is shorter than the average.  If that is the case then the pot from which you take your drawdown does not have to last as long meaning that you could drawn down at a higher rate than 4% and still not run out of money.  

dunstonh

 All the guidance i've read about drawdown is that you should aim to take 4% (ie £4k) a year.

There is no such guidance.  You appear to be referring to US based research on a what may be a sustainable index linked draw for average life expectancy using an medium to medium high asset mix for US based investors.

Comparing a level annuity with a flexible draw using an indexed rate assumption doesn't make the annuity better.

I have just finished setting up a drawdown case with a 6.1% equivalent draw rate.  Its what was needed to fund the gap.  After which, the draw rate will drop and it will become more like a rainy day fund with a much smaller draw and occasional ad-hoc lump sums.     Flexibility gives you a choice.   Lifetime annuities are cast in stone at the outset.

SSTJCKel

dunstonh said:

I have just finished setting up a drawdown case with a 6.1% equivalent draw rate.  Its what was needed to fund the gap.  After which, the draw rate will drop and it will become more like a rainy day fund with a much smaller draw and occasional ad-hoc lump sums.     Flexibility gives you a choice.   Lifetime annuities are cast in stone at the outset.

What GAP ?...... I don't see a point at which my outgoings suddenly reduce.... Apart from when I die.

I get the impression I am missing something here. No one knows when they will expire so I get that the length of time the pension pot has to fund outgoings is a gamble. However if I have 100k and need say 8k a year in addition to my state pension and I retire at 67 that can only be assumed to fund me until i'm 79. Growth is not guaranteed but even factoring in a reasonable pension performance thats only a few more years at best. So what happens when the pension pot runs out ?.... I had relatives who had very poor health, had to give up work early, but lived until late eighties. I also know people who were very fit and healthy and died within a few years of retirement. 

Am I looking at this too simplistically (or conversely am I over complicating it).

My work situation has changed and I was planning to carry on working for up to 5 more years so my planning has suddenly had to change however..... I will be 67 in July and am struggling with the work I do now so will be looking to retire as soon after my 67th Birthday as possible. I have worked out what I need to live on bearing in mind i'm in a private rented home, and can't afford to buy, and I am looking to move north to get cheaper rents. So I worked out the minimum I need to spend on outgoings. I deduct from that the state pension, and any predicted state benefits, and that as far as I can see is 'my' gap. I don't see that diminishing at any point, quite the opposite.

I get that, when I have moved, I may be able to get a part time job to help the pot last longer but I don't know if that will be possible or how much it would bring in so can't factor that in and for how long.

Is there something wrong with the way I am doing the maths ?

In reality I probably need 12k a year to be able to avoid going without some of the things I take for granted now but that would diminish the pension pot even quicker and the question is the same. What do I do then because I still have to be able to pay my bills for the basic utilities, food etc.

Am I doing something wrong here ?