Annuity choice

QrizB

mlv-1967 said:

The £717k is after I have taken £43k tax free, so the total fund is £760k.

Why are you taking such a small tax-free sum? If this is a "normal" DC pension pot, you could take £190k tax-free.

Why only £43k?

ukdw

Re RPI vs LPI - about one year of 8% RPI would I think wipe out the benefit of the LPI additional £1k - so I personally would only consider RPI over LPI.   (

Unless the Tax free cash is also tax free out of an annuity - personally I would consider taking an additional £108k tax free and using it as a bridge to state pension age.

Reducing the annuity from £717k to £609k would I presume reduce the £35.5k RPI annuity down by about £5.5k to £30k.  - But then you could boost it by £12k a year to £42k out of the tax free lump sum, plus your other £8k DB pension up to £50k.

Then when state pension kicks in - the £12k's from the Tax free lump sum would be replaced by state pension.

You should be able to get this drawdown automated so that the £12k state pension bridge feels just like the rest of your 'pension salary'

dunstonh

The fund size is £717k (after £43k of tax free cash has been deducted) and the commission is £10k, which seems reasonable (1.4%).  I did speak to an IFA beforehand, but he wanted to sell me a cash-flow plan for £2,500 before he would discuss annuities, so I said no to that.
I did my own calculations and comparisons when considering a flat-rate annuity but I didn't feel comfortable with being exposed to inflation. I tend to be very cautious by nature, because in my life when s**t could have happened, it usually did (pardon my French).  I am not a huge spender and I don't go on vastly expensive holidays.  I'm just taking the £43k tax free to get a new car and for some house repairs.

An IFA would probably come in around £2500-£4000 as a target.  There will be some greedy ones but £10k commission for doing very little is very expensive.

Remember that IFAs have higher annuity rates than the broker.   The broker rates factor in the commission and lower the annuity rate.   IFAs get the nil commission rate, and you have to factor in the fee (typically taken from the fund after payment of TFC, but can be paid directly if you prefer).     So,  a £10k commission vs a couple of grand fee would see the IFA come in with a better annuity rate.  

With an annuity, you don't need full cashflow planning.   Although you would expect some modelling on an advised cases vs non-advised.      

The £717k is after I have taken £43k tax free, so the total fund is £760k.

As mentioned higher up, why is the tax free cash so low?

poseidon1

mlv-1967 said:

leosayer said:

A few thoughts:

I hear what you say about drawdown, but won't you get a substantial tax free lump sum when you take your annuity? What is your plan for that? How does this fit in with any other non-pension savings you have?

Are you entitled to state pension? The total of this plus your DB and annuity may take you into higher rate tax. 

Instead of spending your entire pot on an annuity, retaining some of the pot and drawing to down may allow you to maximise your income at the basic rate of tax and avoid higher rate tax once your state pension arrives.

You don't have to make one choice of annuity, you could do some at RPI, some at LPI, some flat and possibly some for a fixed term of, perhaps for 10 years until your state pension arrives.

Might sound like a silly question but will you spend all that annuity income? What do you actually need to live the life you want now you find yourself retired?

The £717k is after I have taken £43k tax free, so the total fund is £760k. The tax free sum is to clear the mortgage, buy a new car (mine is 9 years old) and do some minor house improvements.
According to my most recent HMRC quote I am already entitled to a full state pension at 67.

I have already some with all permutations for fixed rate annuities etc, but my best outcome is to get an annuity now, and at 60 take the DB pension as a 'two-stepper': initial step being a higher pension of around £14.5k, followed by a lower pension of around £5.5k once the state pension kicks in.

I am aware of tax implications but not too concerned.  I want my pension to be like a salary, a steady income without complex tweaking, changes here and there, and so forth.

My only comment on your plan, is that the quote ( generous as it is ) seems to be on a single life basis.  An older post indicates you are married. I assume you are happy for a single life annuity to die with you on the basis your wife is ( or will be) financially catered for from pensions of her own and other potential heritable assets?

As another option, rather than divert all the pot into annuity, take the maximum 25% tax free cash to fund maximum tax free ISAs  for a number of years ( if you are not already doing this), to produce tax free income alongside your taxable annuity and DB pension. 

On the figures you quote the combined annuity/ DB will take you close to  40% income tax territory, whilst the state pension will definitely put you over the top in due course.  Tax free ISA income will definitely give you more flexibilty as to when you will hit 40%, and can be inherited by your wife if you predecease her

DRS1

mlv-1967 said:

DRS1 said:

We have had 2 years in the last 20 where RPI has exceeded 5%.  Personally I would not pick an LPI version over an RPI version but it is your money.

I assume both times were during Covid?  Covid is a 'black swan' event, typically a once in a 100 year event, so unlikely to happen again while I'm alive. There is a possible risk of returning to the high inflation of the 1970s but that seems very unlikely given that all parties are committed to sound monetary policy and we now have an OBR to police that. 

2022 and 2023.

I hope you are right (because in a classic case of do as I say not as I do I did not pick an RPI annuity but one increasing at a flat 5%)

And I should have checked back more than 20 years because in 1989 and the early 90s RPI was over 5% (over 8% at times). 

I have heard the word stagflation being bandied around which would be a nightmare for someone like me on fixed increases so I am burying my head in the sand for now.

DRS1

I think I agree with the comments about taking a bigger lump sum.  Yes it would take some years to get the extra £100k into an ISA but if you are married then £40k pa would be available.  Or if you are going to follow the suggestion about using it as a state pension replacement up to SPA then you could put it in a gilt ladder which could get you negligible tax even outside an ISA (if you pick low coupon gilts)

If it is a single life annuity and you are married then presumably you have considered having a guarantee period (which can be up to 30 years) or value protection.  May be cheaper than a joint life annuity?

mlv-1967

poseidon1 said:

mlv-1967 said:

leosayer said:

A few thoughts:

I hear what you say about drawdown, but won't you get a substantial tax free lump sum when you take your annuity? What is your plan for that? How does this fit in with any other non-pension savings you have?

Are you entitled to state pension? The total of this plus your DB and annuity may take you into higher rate tax. 

Instead of spending your entire pot on an annuity, retaining some of the pot and drawing to down may allow you to maximise your income at the basic rate of tax and avoid higher rate tax once your state pension arrives.

You don't have to make one choice of annuity, you could do some at RPI, some at LPI, some flat and possibly some for a fixed term of, perhaps for 10 years until your state pension arrives.

Might sound like a silly question but will you spend all that annuity income? What do you actually need to live the life you want now you find yourself retired?

The £717k is after I have taken £43k tax free, so the total fund is £760k. The tax free sum is to clear the mortgage, buy a new car (mine is 9 years old) and do some minor house improvements.
According to my most recent HMRC quote I am already entitled to a full state pension at 67.

I have already some with all permutations for fixed rate annuities etc, but my best outcome is to get an annuity now, and at 60 take the DB pension as a 'two-stepper': initial step being a higher pension of around £14.5k, followed by a lower pension of around £5.5k once the state pension kicks in.

I am aware of tax implications but not too concerned.  I want my pension to be like a salary, a steady income without complex tweaking, changes here and there, and so forth.

My only comment on your plan, is that the quote ( generous as it is ) seems to be on a single life basis.  An older post indicates you are married. I assume you are happy for a single life annuity to die with you on the basis your wife is ( or will be) financially catered for from pensions of her own and other potential heritable assets?

As another option, rather than divert all the pot into annuity, take the maximum 25% tax free cash to fund maximum tax free ISAs  for a number of years ( if you are not already doing this), to produce tax free income alongside your taxable annuity and DB pension. 

On the figures you quote the combined annuity/ DB will take you close to  40% income tax territory, whilst the state pension will definitely put you over the top in due course.  Tax free ISA income will definitely give you more flexibilty as to when you will hit 40%, and can be inherited by your wife if you predecease her

The quote is joint, with 40% widow's pension.  My wife (55) still works, has her own pension pot, and stands to inherit, as an only child, a substantial estate when her 87 year mother passes away, presumably at some point in the next 20 years.  I have no inheritance due to me - all I received was put into the mortgage.

mlv-1967

DRS1 said:

I think I agree with the comments about taking a bigger lump sum.  Yes it would take some years to get the extra £100k into an ISA but if you are married then £40k pa would be available.  Or if you are going to follow the suggestion about using it as a state pension replacement up to SPA then you could put it in a gilt ladder which could get you negligible tax even outside an ISA (if you pick low coupon gilts)

If it is a single life annuity and you are married then presumably you have considered having a guarantee period (which can be up to 30 years) or value protection.  May be cheaper than a joint life annuity?

I looked at a guarantee period, but I want to make sure my wife is protected after my death.  A guarantee has limits and 30 years would be very expensive.

mlv-1967

dunstonh said:

The fund size is £717k (after £43k of tax free cash has been deducted) and the commission is £10k, which seems reasonable (1.4%).  I did speak to an IFA beforehand, but he wanted to sell me a cash-flow plan for £2,500 before he would discuss annuities, so I said no to that.
I did my own calculations and comparisons when considering a flat-rate annuity but I didn't feel comfortable with being exposed to inflation. I tend to be very cautious by nature, because in my life when s**t could have happened, it usually did (pardon my French).  I am not a huge spender and I don't go on vastly expensive holidays.  I'm just taking the £43k tax free to get a new car and for some house repairs.

An IFA would probably come in around £2500-£4000 as a target.  There will be some greedy ones but £10k commission for doing very little is very expensive.

Remember that IFAs have higher annuity rates than the broker.   The broker rates factor in the commission and lower the annuity rate.   IFAs get the nil commission rate, and you have to factor in the fee (typically taken from the fund after payment of TFC, but can be paid directly if you prefer).     So,  a £10k commission vs a couple of grand fee would see the IFA come in with a better annuity rate.  

With an annuity, you don't need full cashflow planning.   Although you would expect some modelling on an advised cases vs non-advised.      

The £717k is after I have taken £43k tax free, so the total fund is £760k.

As mentioned higher up, why is the tax free cash so low?

I did some quotes and the 1.4% charge is lower than many others. I did loads of comparisons. Even if you go directly to the pension company, what you get is less.  I compare the Moneyhelper quotations with the broker, and the latter was much better. 

af1963

DRS1 said:

We have had 2 years in the last 20 where RPI has exceeded 5%.  Personally I would not pick an LPI version over an RPI version but it is your money.

It's happened in nine years of my adult lifetime since 1980, in three separate time periods, with different causes on each occasion.