Annuities - why all the hate?

DT2001

Fermion said:

Albermarle said:

I follow most of the logic behind getting an annuity discussed in this and other posts, but I do not quite follow this onepoint.

Not only does this significantly reduce any future IHT liability 

Although your pension pot will be smaller, you will have an higher monthly/annual income.
If you do not spend it, then it will build up in your estate ( as savings etc) so you will slowly increase any IHT liability, probably at some point to back where you started, or possibly even worse.

If you do spend it, then without an annuity you could have presumably just drawn more income from your DC pot, which would also have reduced your IHT liability.

In reality increased spending and gifting are the key points for reducing IHT liability, not whether you get an annuity or not. It is possible it might help, as there so many different possible circumstances, but from an IHT perspective ( under the new rules in 2027)  you are just shifting money from pension to the rest of your estate.

I take your point regarding additional monthly income, we have been gifting a small amount to our son who is saving to buy a property. We intend to significantly increase our monthly gifts to him. As you are aware regular gifts out of surplus income are outside the scope of IHT. We will update the paperwork once the annuity income arrives as a record of our regular surplus income gifts.

As I mentioned previously, I personally think the admin around continually selling funds to increase drawdown income will be a lot more difficult than just having a slug transferred into an annuity, but other may disagree.

I think you need to check the eligibility of annuity income (see below which was copied from HMRC manuals).  I came across a similar problem with my MIL as she has a discounted gift trust which holds an investment bond - these payments are considered return of capital for 20 years, I think, on the assumption of being 5% p.a. I cannot find a definition of the capital element 

The capital element of a purchased life annuity within the meaning of ITTOIA2005/S423 (IHTM20631) purchased on or after 13 November 1974 is not regarded as part of the transferor’s income for the purposes of the exemption in accordance with IHTA84/S21(3).

Albermarle

DT2001 said:

Fermion said:

Albermarle said:

I follow most of the logic behind getting an annuity discussed in this and other posts, but I do not quite follow this onepoint.

Not only does this significantly reduce any future IHT liability 

Although your pension pot will be smaller, you will have an higher monthly/annual income.
If you do not spend it, then it will build up in your estate ( as savings etc) so you will slowly increase any IHT liability, probably at some point to back where you started, or possibly even worse.

If you do spend it, then without an annuity you could have presumably just drawn more income from your DC pot, which would also have reduced your IHT liability.

In reality increased spending and gifting are the key points for reducing IHT liability, not whether you get an annuity or not. It is possible it might help, as there so many different possible circumstances, but from an IHT perspective ( under the new rules in 2027)  you are just shifting money from pension to the rest of your estate.

I take your point regarding additional monthly income, we have been gifting a small amount to our son who is saving to buy a property. We intend to significantly increase our monthly gifts to him. As you are aware regular gifts out of surplus income are outside the scope of IHT. We will update the paperwork once the annuity income arrives as a record of our regular surplus income gifts.

As I mentioned previously, I personally think the admin around continually selling funds to increase drawdown income will be a lot more difficult than just having a slug transferred into an annuity, but other may disagree.

I think you need to check the eligibility of annuity income (see below which was copied from HMRC manuals).  I came across a similar problem with my MIL as she has a discounted gift trust which holds an investment bond - these payments are considered return of capital for 20 years, I think, on the assumption of being 5% p.a. I cannot find a definition of the capital element 

The capital element of a purchased life annuity within the meaning of ITTOIA2005/S423 (IHTM20631) purchased on or after 13 November 1974 is not regarded as part of the transferor’s income for the purposes of the exemption in accordance with IHTA84/S21(3).

Purchased Life annuities are a relatively rare item.
I think the OP ( and nearly all purchasers of annuities) is looking to buy an annuity with a pension pot.

snowlaser

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Compare those with these from December 2021!

Yes - I certainly get why people back in 2021 were negative towards annuities!

Thanks everyone for your thoughts here.  It makes me still minded to buy an annuity - but perhaps with a smaller proportion of my fund than I had initially thought.  Also the poster who said "add up your outgoings" - yes I agree, I think the right approach will be to work out what my basic expenditure is per month on essentials, and then buy an annuity for that (plus a bit) and let drawdown cover the "fun".

FIREDreamer

snowlaser said:

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Compare those with these from December 2021!

Yes - I certainly get why people back in 2021 were negative towards annuities!

Thanks everyone for your thoughts here.  It makes me still minded to buy an annuity - but perhaps with a smaller proportion of my fund than I had initially thought.  Also the poster who said "add up your outgoings" - yes I agree, I think the right approach will be to work out what my basic expenditure is per month on essentials, and then buy an annuity for that (plus a bit) and let drawdown cover the "fun".

I annuitised 65% of my pension in October 2023 and the rest (bar a few quid) in June 2025. Both with uncapped RPI.

It has made me a higher rate taxpayer in retirement at 61. First world problem.

Why would I take more risk when the game is won, especially given there will be inheritance tax on unused pension pots from 2027 and I can gift what I like from unused income inheritance tax free?

I have a S&S ISA not far off a million quid so that is enough investment risk for me.

Albermarle

FIREDreamer said:

snowlaser said:

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Compare those with these from December 2021!

Yes - I certainly get why people back in 2021 were negative towards annuities!

Thanks everyone for your thoughts here.  It makes me still minded to buy an annuity - but perhaps with a smaller proportion of my fund than I had initially thought.  Also the poster who said "add up your outgoings" - yes I agree, I think the right approach will be to work out what my basic expenditure is per month on essentials, and then buy an annuity for that (plus a bit) and let drawdown cover the "fun".

I annuitised 65% of my pension in October 2023 and the rest (bar a few quid) in June 2025. Both with uncapped RPI.

It has made me a higher rate taxpayer in retirement at 61. First world problem.

Why would I take more risk when the game is won, especially given there will be inheritance tax on unused pension pots from 2027 and I can gift what I like from unused income inheritance tax free?

I have a S&S ISA not far off a million quid so that is enough investment risk for me.

For now.......

FIREDreamer

Albermarle said:

FIREDreamer said:

snowlaser said:

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Compare those with these from December 2021!

Yes - I certainly get why people back in 2021 were negative towards annuities!

Thanks everyone for your thoughts here.  It makes me still minded to buy an annuity - but perhaps with a smaller proportion of my fund than I had initially thought.  Also the poster who said "add up your outgoings" - yes I agree, I think the right approach will be to work out what my basic expenditure is per month on essentials, and then buy an annuity for that (plus a bit) and let drawdown cover the "fun".

I annuitised 65% of my pension in October 2023 and the rest (bar a few quid) in June 2025. Both with uncapped RPI.

It has made me a higher rate taxpayer in retirement at 61. First world problem.

Why would I take more risk when the game is won, especially given there will be inheritance tax on unused pension pots from 2027 and I can gift what I like from unused income inheritance tax free?

I have a S&S ISA not far off a million quid so that is enough investment risk for me.

For now.......

There are always cashpoints people can withdraw cash from should the government play dirty. 😉

Fermion

Purchased Life annuities are a relatively rare item.
I think the OP ( and nearly all purchasers of annuities) is looking to buy an annuity with a pension pot.

Yes that's correct - I've just applied to switch £300K of my Drawdown pot in a lifetime level Annuity with 100% spouse and 5 years guarantee via a quote through HL. The best original quote was L&G at £25,087 and I completed the application form last week and sent  to HL. However HL ran the quote again before submitting to L&G and this has increased to £25,818. They have now submitted to L&G.

Albermarle

Fermion said:

Purchased Life annuities are a relatively rare item.
I think the OP ( and nearly all purchasers of annuities) is looking to buy an annuity with a pension pot.

Yes that's correct - I've just applied to switch £300K of my Drawdown pot in a lifetime level Annuity with 100% spouse and 5 years guarantee via a quote through HL. The best original quote was L&G at £25,087 and I completed the application form last week and sent  to HL. However HL ran the quote again before submitting to L&G and this has increased to £25,818. They have now submitted to L&G.

Out of interest:
1) Did you originally have £400K - so £100K tax free and £300k to buy the annuity. Was this all done at the same time, or did you take the tax free part some time ago and just bought the annuity with crystallised funds?
2) Have you any idea how much less the income was for 100% spouse compared to the more typical 50%?

Fermion

Albermarle said:

Fermion said:

Purchased Life annuities are a relatively rare item.
I think the OP ( and nearly all purchasers of annuities) is looking to buy an annuity with a pension pot.

Yes that's correct - I've just applied to switch £300K of my Drawdown pot in a lifetime level Annuity with 100% spouse and 5 years guarantee via a quote through HL. The best original quote was L&G at £25,087 and I completed the application form last week and sent  to HL. However HL ran the quote again before submitting to L&G and this has increased to £25,818. They have now submitted to L&G.

Out of interest:
1) Did you originally have £400K - so £100K tax free and £300k to buy the annuity. Was this all done at the same time, or did you take the tax free part some time ago and just bought the annuity with crystallised funds?
2) Have you any idea how much less the income was for 100% spouse compared to the more typical 50%?

1) It was crystallised many years ago so £300K from the crystallised funds. My original pot was £967,672 and was crystallised in 3 phases - the 1st in Dec 2015, final phase in 2021. The pot has grown significantly since then even after taking around 3.8% per annum income. I've still got a £672K pot even after the taking a £300K Annuity.
2) No I didn't get a quote for 50% spouse annuity - we always intended  100% spouse.

MarzipanCrumble

Thanks for all the comments.  

I use the IHT403 page 8  for recording transcribed to Excel - bit of guessing what HMRC mean by their labels but I have commented on the spreadsheet what I have included for each category.

Yes I am 'rich' though more ttan half in house sale value.  But I do resent that what I have saved and paid tax on once will be taxed again.  I would rather income tax went up for higher rate taxpayers as that would be fairer in my view.