25% Tax Free Lump Sum or whole amount used in annuity?

D0nkeyoaty

Hi all.  I have an employer’s retirement savings plan (not Final Salary just to be clear) and I am 67 so would like to take the pension.  The dilemma I have is whether to take the TFLS or use the whole amount to buy an annuity. 

I don’t want income drawdown as pots can go down as well as up and I'm risk averse.

I could take TFLS and then make regular withdrawals from the balance, but then I’ve read that pension companies charge an ‘Admin’ fee for every withdrawal, so if I do that monthly for example, that’s going to eat into the pot.

My preference would be to have a higher monthly annuity income and forgo the TFLS, however, if I do that:  Does that mean I lose the tax free benefit and say goodbye to potentially thousands of pounds, and if so, would someone be able to point out the pros and cons of taking the whole amount as an annuity, i.e. Could there be some benefit in the future I have not considered which would balance losing the TFLS tax benefit?

I should point out here, I’m not asking for financial advice, I’m just looking to plug knowledge gaps.  I've had a Pensionwise phone interview, but I didn’t find that very helpful TBH, the advisor clearly had better things he wanted to do and couldn’t wait to get through it, it felt like a bit of a sprint to the finish line.

dunstonh

 The dilemma I have is whether to take the TFLS or use the whole amount to buy an annuity. 

No dilemma.   Unless you have a GAR of a high value, you take the 25% TFC.   You do not use tax free money to buy a taxable income.

I don’t want income drawdown as pots can go down as well as up and I'm risk averse.

How did you build up the pension in the first place?

I could take TFLS and then make regular withdrawals from the balance, but then I’ve read that pension companies charge an ‘Admin’ fee for every withdrawal, so if I do that monthly for example, that’s going to eat into the pot.

That is not correct and it wouldn't be in a pension any more either.  

My preference would be to have a higher monthly annuity income and forgo the TFLS, however, if I do that:  Does that mean I lose the tax free benefit and say goodbye to potentially thousands of pounds, and if so, would someone be able to point out the pros and cons of taking the whole amount as an annuity, i.e. Could there be some benefit in the future I have not considered which would balance losing the TFLS tax benefit?

Yes, you lose the tax free benefit.

I've had a Pensionwise phone interview, but I didn’t find that very helpful TBH, the advisor clearly had better things he wanted to do and couldn’t wait to get through it, it felt like a bit of a sprint to the finish line.

Pensionwise do not employ advisers and they cannot give advice.   Its generic information only and mainstream.   I am not sure they would cover off the options you are looking for in respect of the 25%.  Typically that would be purchase life annuity, S&S ISA or cash ISA.or put it back into the pension with annual allowance use.

xylophone

You are now in receipt of your state pension?

You mention the retirement savings plan - is this with your current employer?

If not, are you currently employed and in a workplace pension?

Do you now intend to retire completely from paid employment?

Marcon

D0nkeyoaty said:

Hi all.  I have an employer’s retirement savings plan (not Final Salary just to be clear) and I am 67 so would like to take the pension.  The dilemma I have is whether to take the TFLS or use the whole amount to buy an annuity. 

I don’t want income drawdown as pots can go down as well as up and I'm risk averse.

I could take TFLS and then make regular withdrawals from the balance, but then I’ve read that pension companies charge an ‘Admin’ fee for every withdrawal, so if I do that monthly for example, that’s going to eat into the pot.

My preference would be to have a higher monthly annuity income and forgo the TFLS, however, if I do that:  Does that mean I lose the tax free benefit and say goodbye to potentially thousands of pounds, and if so, would someone be able to point out the pros and cons of taking the whole amount as an annuity, i.e. Could there be some benefit in the future I have not considered which would balance losing the TFLS tax benefit?

I should point out here, I’m not asking for financial advice, I’m just looking to plug knowledge gaps.  I've had a Pensionwise phone interview, but I didn’t find that very helpful TBH, the advisor clearly had better things he wanted to do and couldn’t wait to get through it, it felt like a bit of a sprint to the finish line.

Given what you've said, particularly your comment about being 'risk averse', then perhaps consider taking 25% tax free cash (which then becomes 'yours' rather than still being part of your pension) and using the remaining 75% to buy an annuity. 

Then use the 25% you've taken out as tax free cash to buy a second annuity - only this time, because you are using your own (as opposed to pension fund) money, you get preferential tax treatment, as part of each payment from this second annuity is treated as a return of capital, so isn't subject to income tax.

EdSwippet

Marcon said:

...
Then use the 25% you've taken out as tax free cash to buy a second annuity - only this time, because you are using your own (as opposed to pension fund) money, you get preferential tax treatment, as part of each payment from this second annuity is treated as a return of capital, so isn't subject to income tax.

Right; a 'purchased life annuity'. Much more tax-efficient than passing up on the 25% PCLS, yet with all of the safety (predictability) of a full pension annuity.

D0nkeyoaty

Some fantastic info there for me to think about so many thanks.  I like the comment "You do not use tax free money to buy a taxable income", obvious really I guess, strange how sometimes you cant see what's right in front of you until its pointed out, but that's why I joined here.

@xylophone

You are now in receipt of your state pension? Yes

You mention the retirement savings plan - is this with your current employer? Retired now so ex employer, but yes

If not, are you currently employed and in a workplace pension? No

Do you now intend to retire completely from paid employment? Yes

RogerPensionGuy

I have been doing plenty of research on PLA purchased life annuties. 

All very interesting. 

The tax treatment of the cap or capital component of the payment is very interesting indeed. 

I took a chunk of cash TFLS and deciding if I use a combination of PLA or indeed PLAs and gilts and indeed gilt ladders to augment mitigate tax and try foxing potential IHT down the road. 

Reference IHT mitigation, it's in my plan, but I'm 100% not paranoid about curtailing it and not using my cash flowz as I feel like doing. 

D0nkeyoaty

I’m obviously thinking about pensions a lot at the moment and I have two pots, the main one with about 60% of the total and 40% in the other.  As I said previously, I prefer the security of a monthly income but I preferably don’t really want to be buying two annuities, so I’ve been thinking about consolidation and moving the 40% into the other pot.  The company with the 40% say they don’t charge an exit fee for moving to a different fund, great, but then there’s that word ‘However’.  “However, we may impose an MVR on the movement of funds, you may get back less than you put in”, which sounds suspiciously to me like there is an exit fee in all but name.

So, whilst I appreciate that I may be asking for someone to have clairvoyant powers here, but for the uneducated i.e. Me, what exactly is an MVR and is there a real risk that it could seriously impact on the total amount of the pot?

Marcon

D0nkeyoaty said:

I’m obviously thinking about pensions a lot at the moment and I have two pots, the main one with about 60% of the total and 40% in the other.  As I said previously, I prefer the security of a monthly income but I preferably don’t really want to be buying two annuities, 

Why not? Doing so would seem to fit your situation and attitude to risk very well.

D0nkeyoaty said:

So, whilst I appreciate that I may be asking for someone to have clairvoyant powers here, but for the uneducated i.e. Me, what exactly is an MVR and is there a real risk that it could seriously impact on the total amount of the pot?

See https://forums.moneysavingexpert.com/discussion/6525951/mvr-question-and-factors-prudential#latest

Albermarle

 As I said previously, I prefer the security of a monthly income but I preferably don’t really want to be buying two annuities

Remember there are lots of different types of annuity.

Some will go up with inflation every year. Some will go up by a fixed amount each year ( say 3%). A level annuity will never increase.

Some will pay a spouse a pension if you die, some do not.

Some are for your lifetime, others can be for a fixed term, with some money back at the end.

Plus many other variations.

Of course the more favourable the conditions, the more expensive the annuity is, or you get less income for the same lump sum.

So by having two annuities you could have two different types. A way to hedge your bets maybe.

D0nkeyoaty

Actually, having two different types of annuity is worth considering. Hmmmm.