Annuity - is this a stupid idea?

Kismet_Hardy

Hi everyone. I am an avid reader of the posts on this forum and would appreciate your thoughts on an idea that is running through my head regarding my upcoming retirement. Apologies - this is a long read.

I am knocking on the door of 65, so have just one more year to go to get to state retirement age. My current figures for income at 66 are as follows:-

State pension - £11,502,
DB pension 1 - £12,871 (fully indexed linked)
DB pension 2 - £4,424 (almost all fully indexed linked, a very small proportion has a 5% cap)
The above DB pensions are already in payment
DB pension 3 - £5,649 (fully indexed linked - on the basis that I won't take the lump sum).   

Total = £34,446 per annum.

I also have around £53,000 in a DC pension which I am continuing to pay into, and this is the subject of my question. I could put another £12,000 into this pension now and then take out a 10 year annuity using £65,000 which, according to the Legal and General annuity calculator would generate a lump sum of £16,250 and an income of £5,725 per annum.

This would give me a total of £40,171 (£32,442 net if NI has to be paid - which I think it will post-October budget) per annum for 10 years. Although I earn a fair bit more than this at the moment, I have been throwing money into ISAs and my DB pension, so I know this will be ample for me to live on and treat the children (see later). 

Some context might be useful, I am happily married and there is complete transparency between us over finances. Although all our money is family money, I have always earned something to put into the pot and we have always had our own bank accounts. I would not be comfortable with things being any other way. He is a few years younger than I am, earns a very decent salary, and will continue to work for at least another 2 years. He has his own pension provisions. We both have ISAs and other savings. We also have a considerable amount of equity in our home, and we shall probably downsize in around 10 years or so.   

I am still working on a daily fee paid / consultancy basis but have been slowing down since the beginning of this financial year. I have yet to decide whether to stop altogether or whether to keep on with a handful of days per month. On the one hand, the money is very good and it can fund luxuries for the family well into the future if I keep going. On the other, the days can be pretty tiring and, sometimes, very stressful. Also, there is a fair amount of topping and tailing work, and a constant requirement to keep up with changes in raw data and processes. I do get something from the work itself (I have a good brain and need to stretch it) but I cannot say that I always enjoy it.

We have young adult children who are either still living with us (we take nothing for rent or keep) or are living independently but who are struggling financially (who we help financially from time to time). My husband and I agree that we cannot float off and enjoy a lovely retirement unless and until they are all independently housed and more financially stable.   

I have had some significant health issues over the last few years and I feel a growing sense of time running out. Deciding what to do is occupying a ridiculous amount of my time and brain space. We have been over and over our figures with our IFA and there is no real reason for me to be afraid of stopping work right now. Unfortunately, I am, and no amount of going over the figures is helping.

I feel that if I take the annuity now, when the rates are better than they are likely to be in the future, the additional income generated will take away some of the panic I am feeling. I might even be able to stop before my 66th birthday. Both my husband and IFA say I should go for it if it will make me feel better. But I understand all the reasons why I should leave the DC money alone and why this is a stupid idea. 

Can anyone help unravel this for me please? I appreciate that this is possibly more of a psychological issue than a financial one! 

Bostonerimus1

How much income do you need? You have a good amount of guaranteed income sources and I would leave the DC pension invested aggressively either to pass on to your heirs or to top up your spending. It's also necessary for you to have an easily accessible lump sum for emergencies.

Kismet_Hardy

I just want to add that I appreciate my position is better than that of others and I have no desire whatsoever to cause offence.

Samuelsjourney

Have to agree with @Bostonerimus1 the DB pensions being almost all fully index linked provide a stable income. The DC pension can be used to access a portion of tax free element and continue to grow.

Kismet_Hardy

How much income do I need? It's a very good question. Probably not more than I shall be getting when all the pensions kick in. I can keep the DC pension open until 75, so I can keep paying into that if I continue to work and stray into the higher rate tax bracket. Both my husband and I have lump sums, mostly in ISAs for emergencies.   

I have considered the current IHT position re passing pensions onto the children tax free, but that's only if you die in your mid-70s, isn't it? Also, I think this is something Labour might put an end to. My thinking is that having a higher income now will mean that I can dip feed money to the children which, as it's coming out of income, will not be subject to inheritance tax.     

NoMore

I agree with Bostonerimus1, you already have a large amount of guaranteed income, leaving the DC alone with the flexibility it offers with withdrawals over annuity gives you the best of both worlds.

Of course the flipside is if you are really uncomfortable with not knowing your future income from the DC, then a annuity will alleviate that worry.

Kismet_Hardy

Samuelsjourney said:

Have to agree with @Bostonerimus1 the DB pensions being almost all fully index linked provide a stable income. The DC pension can be used to access a portion of tax free element and continue to grow.

Okay - I thought everyone would be saying this. It does make sense.

Bostonerimus1

Kismet_Hardy said:

How much income do I need? It's a very good question. Probably not more than I shall be getting when all the pensions kick in. I can keep the DC pension open until 75, so I can keep paying into that if I continue to work and stray into the higher rate tax bracket. Both my husband and I have lump sums, mostly in ISAs for emergencies.   

I have considered the current IHT position re passing pensions onto the children tax free, but that's only if you die in your mid-70s, isn't it? Also, I think this is something Labour might put an end to. My thinking is that having a higher income now will mean that I can dip feed money to the children which, as it's coming out of income, will not be subject to inheritance tax.     

You can still take income from your DC pension and gift that to your children

kempiejon

Kismet_Hardy said:

We have young adult children who are either still living with us (we take nothing for rent or keep) or are living independently but who are struggling financially (who we help financially from time to time). My husband and I agree that we cannot float off and enjoy a lovely retirement unless and until they are all independently housed and more financially stable.   

I have had some significant health issues over the last few years and I feel a growing sense of time running out. Deciding what to do is occupying a ridiculous amount of my time and brain space. We have been over and over our figures with our IFA and there is no real reason for me to be afraid of stopping work right now. Unfortunately, I am, and no amount of going over the figures is helping.

I feel that if I take the annuity now, when the rates are better than they are likely to be in the future, the additional income generated will take away some of the panic I am feeling. I might even be able to stop before my 66th birthday. Both my husband and IFA say I should go for it if it will make me feel better. But I understand all the reasons why I should leave the DC money alone and why this is a stupid idea. 

Can anyone help unravel this for me please? I appreciate that this is possibly more of a psychological issue than a financial one! 

Your mental and physical health concerns should be most relevant here. Time is running out and you're afraid of stopping work and maximising that time with your family. That feels dissonant.
Like they say "who, on their death bed said I regret all that time I spend with my loved ones when I could have been at work."

You have enough and you also mention other funds, ISAs and capital in the property. Now is the time to direct that money at you and your family not look for excuses to stay at work which your IFA and husband agree is not making you feel better and you've described as " ... pretty tiring and, sometimes, very stressful."

I have no idea what annuity rates will be in the future but now they offer you a potential solution to your other problems and you've dismissed it as stupid. An annuity gives certainty perhaps there are other financial considerations but what about you?

Still keeping the DC pot will aid with inheritance planning to minimise the tax bill for your estate when you're not around anymore. Hopefully that pot when you're gone will give your children some help with housing or financial support.

You highlight the psychological issue, a lot of the responses focus on the financial. Sometimes there's more than just hard numbers in retirement planning, peace of mind and rewards from being with the family that are not just financial.

Kismet_Hardy

Thank you, Kempijon. You have hit the nail squarely on the head. Although I can see that it makes sense not to take an annuity from the DC pot, from my rather muddled way of looking at it at the moment, it makes perfect sense and a solution to assist with my indecision.

Perhaps I should decide to take the same amount from my ISAs every year instead? But I know that I see the ISA money as savings which are to be used when there is no option, whereas the DC pension is, well, a pension. So it will be very difficult for me to take money from the ISAs as income.   

I can't be the only one who has these muddled thoughts before taking the plunge. 

Dazed_and_C0nfused

I also have around £53,000 in a DC pension which I am continuing to pay into, and this is the subject of my question. I could put another £12,000 into this pension now and then take out a 10 year annuity using £65,000 which, according to the Legal and General annuity calculator would generate a lump sum of £16,250 and an income of £5,725 per annum.

Do you mean a fixed term annuity with nothing returned at the end of the fixed term?

If so is there a spouse pension/payout olif you die within the 10 year period?

And is it fixed at £5,725 or is there an annual increase?  If there is what increase is applied?