Annuities or take the cash ?

BonzoDog123

My first ever post, your thoughts would be appreciated as I have no financial acumen and am going round in circles.
 I am 60 and my freestanding AVC has matured and I have £36,500. I want to take the 25% tax free ( £9000). Do I get a drawdown product, a fixed annuity or a lifetime one at £ 1300 pa ( escalating, joint life etc) or cash in the remaining £27000 and pay tax on it ? ( I know, how long is a piece of string ? ) I have a gardening job paying £5000 p a which I will give up in a couple of years and am able to take a final salary pension of £8500 now if I want, with a tax free lump sum of £25,500.
My husband has a decent pension and will get his state one in 4 years. We have 2 secondary school children to pay for and are mortgage free . We have some small savings in cash ISAs.
Looking at a 10 year fixed annuity we have been quoted £3400 a year x 10 years ie £34000 but the £ 27000 pot is fully gone by the end. So I will have 'made ' £7000, or £700 pa over 10 years.
If I paid tax on the £27000 I worked out I would end up with about £22,000 ? ( guess it depends on if I have taken my £8500 work pension  ?)  If I invested that in a cash ISA at say 4 % ( if they still exist given the latest news ) that would generate £900, tax free unlike the £700, and I get to keep my ££22000 intact . Are my back of an envelope maths valid, are annuities a waste of time ? Thank you for reading.

dunstonh

 I am 60 and my freestanding AVC has matured and I have £36,500. I want to take the 25% tax free ( £9000). Do I get a drawdown product, a fixed annuity or a lifetime one at £ 1300 pa ( escalating, joint life etc) or cash in the remaining £27000 and pay tax on it ?

It shouldn't be maturing at 60.  FSAVCs were reclassified as personal pensions in 2008.   Legacy plan maturity age is frequently 75.  Although some have since been recoded to remove the 75 rule. 

What is more likely is your statement projection age was 60 and they are just asking you what you want to do.  One of the options would be to defer and another would be to transfer.  Neither of which you mention.

If I invested that in a cash ISA at say 4 % ( if they still exist given the latest news ) that would generate £900, tax free unlike the £700, and I get to keep my ££22000 intact .

You don't invest in a cash ISA.  You save in a cash ISA.  However, drawing the pension to put it in a cash ISA is totally pointless.

Are my back of an envelope maths valid, are annuities a waste of time ?

Annuities are very good value for money.     Fixed term annuities can be ideal if you fit a niche. Otherwise lifetime annuities are the more common method.

However, I am not sure you need to do any of the options you mention based on what you have said.  One of the alternatives you didn't mention would likely be most suitable.

Marcon

BonzoDog123 said:

My first ever post, your thoughts would be appreciated as I have no financial acumen and am going round in circles.
 I am 60 and my freestanding AVC has matured and I have £36,500. I want to take the 25% tax free ( £9000). Do I get a drawdown product, a fixed annuity or a lifetime one at £ 1300 pa ( escalating, joint life etc) or cash in the remaining £27000 and pay tax on it ? ( I know, how long is a piece of string ? ) I have a gardening job paying £5000 p a which I will give up in a couple of years and am able to take a final salary pension of £8500 now if I want, with a tax free lump sum of £25,500.
My husband has a decent pension and will get his state one in 4 years. We have 2 secondary school children to pay for and are mortgage free . We have some small savings in cash ISAs.
Looking at a 10 year fixed annuity we have been quoted £3400 a year x 10 years ie £34000 but the £ 27000 pot is fully gone by the end. So I will have 'made ' £7000, or £700 pa over 10 years.
If I paid tax on the £27000 I worked out I would end up with about £22,000 ? ( guess it depends on if I have taken my £8500 work pension  ?)  If I invested that in a cash ISA at say 4 % ( if they still exist given the latest news ) that would generate £900, tax free unlike the £700, and I get to keep my ££22000 intact . Are my back of an envelope maths valid, are annuities a waste of time ? Thank you for reading.

One reason you're going round in circles is that you don't have a destination in mind - so any road will get there!

What are your objectives/priorities? It is rarely as simple as 'getting the most cash I can', and even if that is your objective, you need to decide how much risk you're willing to take to try and get that outcome.

BonzoDog123

Thanks for your replies and taking the time.
I still don't understand why my idea of  £900 p.a interest tax free in an ISA ( and maybe more with compound interest ) is not seen as better than investing in an annuity at say £700 return per annum over 20 years. Ie why are annuities so well approved of ?

Marcon

BonzoDog123 said:

Thanks for your replies and taking the time.
I still don't understand why my idea of  £900 p.a interest tax free in an ISA ( and maybe more with compound interest ) is not seen as better than investing in an annuity at say £700 return per annum over 20 years. Ie why are annuities so well approved of ?

Different products with different purposes.

Not sure you've quite understood how fixed term annuities work - especially when you get to the end of the term. Have a look at http://www.canadalife.co.uk/news/fixed-term-annuities-the-unsung-hero-of-retirement-income/

LHW99

BonzoDog123 said:

Thanks for your replies and taking the time.
I still don't understand why my idea of  £900 p.a interest tax free in an ISA ( and maybe more with compound interest ) is not seen as better than investing in an annuity at say £700 return per annum over 20 years. Ie why are annuities so well approved of ?

It does seem likely though that interest rates will be going down again soon. With an annuity you know what you get each month (and for how long).

If you rely on a cash ISA and interest, you don't know that. While I doubt interest rates will go down as much as they were during 2010-2020 (<1%) any drop would reduce the amount you would be getting, possibly below that of an annuity.

dunstonh

I still don't understand why my idea of  £900 p.a interest tax free in an ISA ( and maybe more with compound interest ) is not seen as better than investing in an annuity at say £700 return per annum over 20 years. Ie why are annuities so well approved of ?

You mentioned fixed term annuity for the £700.  That is guaranteed for the fixed term and then a return of capital on maturity.      Does the terms of the ISA you are referring to have a 20 year fixed rate like the annuity?

How does the fixed term compare to lifetime annuities?

af1963

If you take the annuity ( spending 3400 pa for 10 years, and using up all the capital by the end)  you'll have received 34000 by the end. ( effectively, you've received the original 27k plus £700 per year)

You seem to be comparing that against "22000 after tax, placed in an ISA at 4%, which will generate £900 tax free".  But even if interest rates stay at 4%, that would *only be true in year 1*, if you're spending the same 3400 per year. To get a 3400 income in year 1, that's made up of 900 in interest and 2500 spent from the capital.

The balance in the ISA will reduce each year, so in each subsequent year you'd get even less interest ( and need to withdraw a larger slice of the capital each year.)

On my calculations, you run out of money in year 8.