Annuity - is this a stupid idea?

Kismet_Hardy

Dazed_and_C0nfused said:

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?

It's a fixed term annuity with nothing at the end of it. No spouse pension (my DB pensions all have spouse pensions when I die & my husband has his own DC pensions). No annual increase. So it probably isn't a great deal, looking at it objectively. It's all about helping me feel able to let go of the work. And my understanding is that we spend the most money (on ourselves, at least) up until about 78. That's what I was told in a pension seminar I attended. 

TadleyBaggie

With regard to NI, I don't believe there is any plan to levy NI on pension income. The possible change is to remove the NI exemption on earned income once the state pension age is reached.

Dazed_and_C0nfused

Kismet_Hardy said:

Dazed_and_C0nfused said:

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?

It's a fixed term annuity with nothing at the end of it. No spouse pension (my DB pensions all have spouse pensions when I die & my husband has his own DC pensions). No annual increase. So it probably isn't a great deal, looking at it objectively. It's all about helping me feel able to let go of the work. And my understanding is that we spend the most money (on ourselves, at least) up until about 78. That's what I was told in a pension seminar I attended. 

You are swapping £65,000 for £73,500.

Not convinced this is a great deal.

You could take a fixed £6,500 each year using UFPLS and even if you were just using a SIPP which paid interest on cash balances you would have some left over.

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Albermarle

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.     

There are two separate issues.

When you die any unused funds in a DC pension are not counted as part of your estate when the IHT calculation is done. This is because they are held in trust by the pension provider. That is why you nominate a beneficiary via an Expression of Wishes form, and you do not mention or include any such pension in your will. 

Secondly your beneficiary can withdraw all the pension pot left to them tax free if you die under 75, but will have to pay tax on it if you die after age 75.

There are some rumours that there could be some changes, especially as the respected Institute of Fiscal Studies as reported many times that they think the tax regime surrounding DC pensions on death is excessively generous.

Pat38493

To be honest I sympathise with you as I am a bit like that - I have done a lot of research and I could probably already stop working now, but I am hesitating (although in the short term it's mainly because my wife has open health insurance claims with my policy that is through my work!).    However I am scared of actually pulling the trigger.

I don't have an IFA.  I guess my thinking is - why are you paying an IFA to advise you if you won't take their advice that you are fine to stop working?  Beyond that it's maybe more of a psychological question than a purely financial one.

Phossy

As indicated above and in other posts, this does not seem to be a financial issue, it is a psychological one. Until you understand what is stopping you I think you will you will just churn numbers until you end up the richest person in the graveyard. Keep your DC, kick out the kids, get on a world cruise and make sure you are away long enough and unreachable to make them sort themselves out.

Failing that, rather than focus on how much money you have, actually plan out your spend for the next 10 years (or chosen number) and include everything (I have 10 years of bucket list holidays in my plan - individually priced). Put the focus on what you want to achieve. You might have some fun researching your bucket list.

Kismet_Hardy

TadleyBaggie said:

With regard to NI, I don't believe there is any plan to levy NI on pension income. The possible change is to remove the NI exemption on earned income once the state pension age is reached.

Thank you. This is probably the way it will go, initially at least. 

Kismet_Hardy

Dazed_and_C0nfused said:

Kismet_Hardy said:

Dazed_and_C0nfused said:

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?

It's a fixed term annuity with nothing at the end of it. No spouse pension (my DB pensions all have spouse pensions when I die & my husband has his own DC pensions). No annual increase. So it probably isn't a great deal, looking at it objectively. It's all about helping me feel able to let go of the work. And my understanding is that we spend the most money (on ourselves, at least) up until about 78. That's what I was told in a pension seminar I attended. 

You are swapping £65,000 for £73,500.

Not convinced this is a great deal.

You could take a fixed £6,500 each year using UFPLS and even if you were just using a SIPP which paid interest on cash balances you would have some left over.

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

This makes much more sense than my idea about an annuity - and is why I needed to hear it. I shall probably put a lump sum in my DC pension before the October budget and then leave it there.    

Kismet_Hardy

Albermarle said:

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.     

There are two separate issues.

When you die any unused funds in a DC pension are not counted as part of your estate when the IHT calculation is done. This is because they are held in trust by the pension provider. That is why you nominate a beneficiary via an Expression of Wishes form, and you do not mention or include any such pension in your will. 

Secondly your beneficiary can withdraw all the pension pot left to them tax free if you die under 75, but will have to pay tax on it if you die after age 75.

There are some rumours that there could be some changes, especially as the respected Institute of Fiscal Studies as reported many times that they think the tax regime surrounding DC pensions on death is excessively generous.

Yes, I do understand the issues relating to when the pension pot can be passed on tax free. It really wouldn't surprise me if Labour didn't put a stop to that this coming budget. This is one of the reasons behind my idea to take out more income than I really need and pass money to the kids on a regular basis to enable them to save up a house deposit.

najan49

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.