TFLS Confusion

sparklymarkly

I‘ve learned a huge amount from reading this forum so thanks to everyone for the valuable advice!
I retired early and am just coming up to my 60th birthday at which point, an old DC pension kicks in.
It’s a guaranteed annuity type so I will be taking it as that (done a few sample quotes and what they’re offering does beat the comparisons so the GAR must be working).
Not interested in converting it to drawdown or anything like that (yes I’ve read the posts about giving up a GAR policy and the hoops you have to jump through!).
This is by no means a massive pot or anything (about £55k) so is never going to pay very much but it’s income so is always welcome.
My only dilemma is whether to take the 25% tax free lump sum or not. 

Taking it reduces the pension by about £900 a year and because I am still a basic rate taxpayer (I have two other annuities in place and a couple of part time seasonal jobs), my thinking is that I’ll be paying tax on whatever pension I get so might as well keep it lower and have the TFLS up front.
My calculations show that it’ll take about 15 years to ‘earn back’ the TFLS in enhanced pension so I would be better having it now. Who knows what’s around the corner?
I would probably put the TFLS in another ISA anyway so it would earn a bit of tax free cash anyway.
Any thoughts would be appreciated.

DRS1

Interesting post as it highlights two contradictory instincts that I have.

First take the maximum TFLS because it is tax free

Second take the maximum pension from a GAR policy because you won't get that sort of value for money anywhere else.

I suppose it comes down to number crunching.  You identify 15 years as the cross over point.  I should have thought the chances of a 60 year old making it to 75 were rather good but as you say who knows and a bird in the hand ...

Sometimes it comes down to what would you do with the TFLS.  Sticking it in an ISA is very sensible but it does make it sound like you don't really need it.

There are threads on here about when not to take the maximum TFLS and perhaps you should search for some of them to see if any of the reasoning (mostly based on commutation rates I think) resonates with you.  

Albermarle

 I should have thought the chances of a 60 year old making it to 75 were rather good but as you say who knows and a bird in the hand ...

They are rather good as long as you have no obvious life limiting illness, or do not smoke 60 a day.
There is a 50% chance of reaching 84 and a 25% chance or getting to your nineties.

QrizB

Reading between the lines, you're being offered roughly £3600 a year for £55k or £2700 a year + £14k TFLS? That's 6.5% at age 60?

Is the annuity index linked? If so to what index (RPI?) and is that capped or uncapped?

sparklymarkly

Thanks for the replies - glad it’s not just me that’s confused!
It is very much the “bird in the hand” dilemma for me.
I’d like to think I have a good few years left (was a smoker but gave up 15 years ago) - generally in good health but SIL has just been diagnosed with terminal cancer and it makes you think.
QrizB - your sums are pretty much bang on but it’s a fixed level annuity so there’s no index linking involved. 

If it was index linked, I think I would definitely be tempted to leave the TFLS so the pension would grow more with linking but it won’t.

There is a 50% spouse pension incorporated. 

I appreciate that many of the similar threads on here relate to whether commutation rates are decent but obviously as this is not a DB pension, that’s irrelevant here and it’s just a tax free part of the pot that I can have if I want it.
From the many threads I have studied, it seems that FAs have often favoured taking the lump sum from DC pots but not so much DBs.
And to quote DRS1, no I don’t really ‘need’ the lump sum now but can’t help thinking that when it’s in my hands, it’s actually mine! 

 

Secret2ndAccount

14k, used to buy a level annuity, would get you about £900/yr. So it's a draw. However, the annuity income would be taxable, and the TFLS is tax free. So on this occasion, I would say take the TFLS. Numerically, it's a win. If you put the money in an ISA, tend to it, and only spend it when you need it, that's definitely a win. IMO if you immediately spend half of it on something you fancy, that's also a win.

DRS1

I know the headline rate for a GAR is based on a level annuity but I think you can ask for an increasing annuity without losing the GAR - yes the starting amount would be lower but not as low as a normal annuity rate for an annuity increasing at the same rate.  At least that is what I was told for a GAR annuity I have not started yet.  Maybe it is different for yours and maybe it does not matter if your other annuities are bigger and/or increasing annuities.

sparklymarkly

Secret2ndAccount said:

14k, used to buy a level annuity, would get you about £900/yr. So it's a draw. However, the annuity income would be taxable, and the TFLS is tax free. So on this occasion, I would say take the TFLS. Numerically, it's a win. If you put the money in an ISA, tend to it, and only spend it when you need it, that's definitely a win. IMO if you immediately spend half of it on something you fancy, that's also a win.

That’s pretty much what my head is telling me. 

Immediately spending it on something I fancy is equally appealing but what I fancy and what SWMBO regards as acceptable are two different things!! 

I don’t think there is any option for an increasing annuity - the only 4 options I was given were single life or joint life level annuities either with or without TFLSs.

LHW99

Just to check - do you have a partner, if so what is their pension situation, and would the decision affect the spouse pension (eg if you took an increased pension, would the spouse pension increase)?

sparklymarkly

Yes - I am married. She on a pretty decent civil service pension and we will both be entitled to full SP in a few years as well.
My pension pays 50% of whatever amount to her after my death so obviously reducing the amount would affect that later.
However, if I were to go first, she’d have the TFLS if I’ve taken it (& not wasted it on something I fancied!).
It really does seem to be a swings and roundabouts situation.

bolwin1

sparklymarkly said:

Yes - I am married. She on a pretty decent civil service pension and we will both be entitled to full SP in a few years as well.
My pension pays 50% of whatever amount to her after my death so obviously reducing the amount would affect that later.
However, if I were to go first, she’d have the TFLS if I’ve taken it (& not wasted it on something I fancied!).
It really does seem to be a swings and roundabouts situation.

A lot of pensions leave the spouses benefit as-is regardless of the TFLS taken, so it's worth double checking that if it's important to you.