Using part of DB lump sum (SAUL pension) to buy an annuity. Any good reason to do this?

katejo

I am already aware that the commutation factor for the DB lump sum tends to be poor. I don't need a large lump sum as I have other savings and no debts to clear. My instinct is to slightly reduce the default lump sum amount and get more as my monthly income. A financial advisor recently surprised me when he  suggested that I might consider taking a larger lump sum and using it to buy an annuity (based on my health at the time of purchase).  Is there any advantage in doing this? I did ask the advisor this but wasn't convinced by his reply. I would just like to hear one or two other views on this which I can keep in mind next time I speak to him. Thanks

DullGreyGuy

So do you have ill health or lifestyle factors that would result in you being entitled to buy an Enhanced Annuity? 

Ultimately it's not too hard to do the sums, ask the pension to confirm what your lump sum would be and the impact on your continuing pension and then get quotes for annuities with that lump sum. You just need to consider things like escalations and second life benefits as its very possible that you may get more money immediately under this arrangement but the results may change if you live to 110 depending on the indexation of both pension and annuity. 

MTB1986

I’ve seen it said on these boards more than once (by very knowledgable posters) that it’s not good financial sense to spend tax free cash on an annuity that will be taxable when it’s paid, but I don’t have any specific knowledge or expertise beyond that anecdotal comment. 

af1963

The db commutation factor will not take account of your health. So if you have significant health issues which may tend to reduce your life expectancy, you *might* benefit from taking the lump sum and converting it to annuity at a better personalised rate.  But you'd ideally get personal quotes for the annuity before committing to this. And then it may depend on how fast the db pension administrators can deliver the lump sum so that you can buy the annuity while the quote is still valid.  Some administrators may struggle with this.

Possible tax reasons too: if you buy the annuity from the tax-free cash, part of the payments won't be treated as income, so won't incur tax. If you take it as higher pension from the db, it's all taxable.

If the db pension only has limited inflation protection, you might also choose to buy an annuity which was guaranteed to match RPI, if you preferred that level of protection.  Or the other way round: if you'd prefer more money in the early years of retirement, you might buy a level annuity which will pay out more to begin with but will never increase, so it becomes less valuable in later years.

Albermarle

MTB1986 said:

I’ve seen it said on these boards more than once (by very knowledgable posters) that it’s not good financial sense to spend tax free cash on an annuity that will be taxable when it’s paid, but I don’t have any specific knowledge or expertise beyond that anecdotal comment. 

Normally you take the 25% tax free and buy an annuity with the 75%. The latter is taxable, as it would have been if just withdrawn from the pension.

The tax free cash is just money in your bank, same as any other money you have .
You can buy what is called a Purchased life annuity with any spare cash you have. The income from it is mostly not taxed.
These are only a very small part of the annuity market, with only a handful of providers, and probably because of that the annuity rates tend to be poorer than traditional annuities.

katejo

DullGreyGuy said:

So do you have ill health or lifestyle factors that would result in you being entitled to buy an Enhanced Annuity? 

Ultimately it's not too hard to do the sums, ask the pension to confirm what your lump sum would be and the impact on your continuing pension and then get quotes for annuities with that lump sum. You just need to consider things like escalations and second life benefits as its very possible that you may get more money immediately under this arrangement but the results may change if you live to 110 depending on the indexation of both pension and annuity. 

No no ill health/lifestyle factors

katejo

Albermarle said:

MTB1986 said:

I’ve seen it said on these boards more than once (by very knowledgable posters) that it’s not good financial sense to spend tax free cash on an annuity that will be taxable when it’s paid, but I don’t have any specific knowledge or expertise beyond that anecdotal comment. 

Normally you take the 25% tax free and buy an annuity with the 75%. The latter is taxable, as it would have been if just withdrawn from the pension.

The tax free cash is just money in your bank, same as any other money you have .
You can buy what is called a Purchased life annuity with any spare cash you have. The income from it is mostly not taxed.
These are only a very small part of the annuity market, with only a handful of providers, and probably because of that the annuity rates tend to be poorer than traditional annuities.

Surely the 25% tax free only applies to DC pension pots, not DB tax free lump sums?

Albermarle

katejo said:

Albermarle said:

MTB1986 said:

I’ve seen it said on these boards more than once (by very knowledgable posters) that it’s not good financial sense to spend tax free cash on an annuity that will be taxable when it’s paid, but I don’t have any specific knowledge or expertise beyond that anecdotal comment. 

Normally you take the 25% tax free and buy an annuity with the 75%. The latter is taxable, as it would have been if just withdrawn from the pension.

The tax free cash is just money in your bank, same as any other money you have .
You can buy what is called a Purchased life annuity with any spare cash you have. The income from it is mostly not taxed.
These are only a very small part of the annuity market, with only a handful of providers, and probably because of that the annuity rates tend to be poorer than traditional annuities.

Surely the 25% tax free only applies to DC pension pots, not DB tax free lump sums?

Yes you are right DB pensions, have a tax free Pension Commencement Lump sum.
I should have read the post more carefully, but they would still be looking at a Purchased Life Annuity anyway.

squirrelpie

You mentioned a 'financial advisor'. Was this an Independent financial adviser or not? Does this adviser by any chance sell annuities? My instinct would be to ignore the idea of an annuity and to take the pension as you originally planned.

QrizB

katejo said:

A financial advisor recently surprised me when he  suggested that I might consider taking a larger lump sum and using it to buy an annuity (based on my health at the time of purchase).  Is there any advantage in doing this?

See bold.

If you're in poor health at the time you retire, you might qualify for an enhanced annuity rate that's better than the commutation rate on your pension. But that's simply because you'll be expected to die significantly younger than someone who's in good health.

I don't know the commutation rate with SAUL, but if it's the usual public-sector 12:1 then giving up £8300 of pension would yield a lump sum of £100k. That lump sum would currently buy a healthy 65-yo an RPI-linked annuity of about £5300. 5300 is quite a lot less than 8300, so for a healthy retiree it doesn't sound a good deal.

daveyjp

A DB pension is in essence an annuity.  You are paid a guaranteed amount per year for life.

If you don't want a lump sum ask SAUL for a quote without one and see how much your annual pension increases.  You can the  compare it with an annuity on similar terms to the DB pension (if you can find one as I suspect it is generous).