Fixed Annuity or drawdown

Maria2512

Hi,

just when I was convinced an annuity was the way to go, drawdown has reared its head, which I know nothing about! I am trying to work if there any tax advantages on either choice. 

100k AVC pot
5 year Fixed Annuity or drawdown(over 5 years)?
work pension 22k
tax code 1257L

i like the certainty of the 5 year fixed annuity but not sure I’ll be utilising all my tax allowances correctly. Or am I overthinking it?

Any comments/pointers?

Thanks 

DRS1

Have you got other income?
Why did you pick 5 years?  Is that to get you to state pension age?  Or is it to give you £20k pa which you can add to an ISA?
Is the AVC linked to the work pension?  Do they interact in any way - eg LGPS allows you to maybe take all the AVC as a tax free lump sum at the same time as you take the main scheme pension.

Maria2512

@DRS1 The 5 years is to bridge a gap. It is linked to a lgps work pension. 

DRS1

Someone like @Silvertabby would know how LGPS AVCs work - especially if they do drawdown.  I have a notion that to the extent they are not used for tax free cash they usually buy extra scheme pension (ie spread over the rest of your life not just 5 years).

Maybe to do drawdown would require a transfer?

Drawdown can be simple but does raise the issue of how do you invest.  For a short period like 5 years you would probably want it in cash (a STMMF perhaps).

I wonder if you have looked at the figures for drawing the main pension 5 years early with the AVC as tax free cash to the extent allowed and boosting the pension if you can't use it all as tax free cash? 

GunJack

LGPS is a DB scheme, so no drawdown on the main pension. The AVC can fund a lump sum up to a limit, with the balance (if any) normally used to fund higher pension. Don't know about partial transfers out, maybe @Silvertabby could advise further?

Silvertabby

LGPS AVCs are used primarily for the tax benefits - tax relief in, 100% tax free (up to HMRC limits) out.  But with the option of using some or all of the funds to buy additional fully index linked LGPS benefits.

Drawdown (of just the AVC) would mean first transferring the fund to a suitable scheme - and immediately losing the 100% tax free status (usual 25% would come in to play).

Secret2ndAccount

Drawdown vs annuity gives much the same outcome in tax terms. But here's an alternate plan.
Your current plan A:
Take the 100k AVC as drawdown or annuity. If you have no other income, I make it only 2k in tax that you will pay over 5 years. That's 98k take home.
Then you get 3 yrs pension as a tax free lump sum. 66k
So you have 98k+66k = 164k, then 22k/yr for life.

Plan B: Linked AVC as TFLS
Start the pension now. It is reduced by 21% for early start, so 17.4k (16.4k after tax). Take the 100k as your TFLS - all tax free. Refuse the 3 yrs lump sum (52k) and put it back into the pension, which adds 4.3k/yr.
So, you have 5 years of 16.4k  + 100k = 182k, followed by 21.9k per year for life. About 20k more over the next 5 years. This also gives you 100k of 182k up front, whereas Plan A gives you 66k of the 164k at the end of 5 years.

You need to check the exact numbers for your specific case, but I present this to you as an option. For Plan B, you don't worry about drawdown or annuity. You get 100k up front and put it in the best interest-bearing accounts you can find at the time.

Plan B, IMO gives you more money, more up front, and would make it easier to pay yourself a more constant amount over the period before/after State Pension kicks in.

DRS1

@Secret2ndAccount I confess I don't understand Plan B.

Surely if you don't take the main scheme PCLS then the extra main scheme pension would kick in from when you start to take it not five years later?  So it wouldn't be 5 years of 16.4k followed by 21.9k for life it would be say 20k for life. 

Of course we don't know if the OP's 22k pension figure was with or without a main scheme PCLS.
 

Secret2ndAccount

You are quite right: the full sum kicks in right away. Sorry, senior moment. It actually makes Plan B better. Let's try this again

Plan B: Linked AVC as TFLS
Start the pension now. It is reduced by 21% for early start, so 17.4k.  Refuse the 3 yrs lump sum (52k) and put it back into the pension, which adds 4.3k/yr. So 21.7k per year for life. Take the 100k AVC as your TFLS - all tax free, and yours on Day 1.
Looking at the first 5 years, it would be 19.9k per year after tax + 100k = 199.5k

So now it's 35k better, although you give back £300/yr (minus tax) in pension.

I did recommend the OP to work out their own number. They seem to be planning to go with the default retirement date, and keeping the AVC separate, so I think assuming with the default lump sum was reasonable.

Tree_pipe99

For my LGPS DB pension, it made more sense to take all of my AVC as a tax-free lump sum, so I didn't have to reduce the DB pension by 25%. In the long term it works out much better.

Each person needs to do their own sums though. It won't be right for everyone.

SarahB16

Maria2512 said:

@DRS1 The 5 years is to bridge a gap. It is linked to a lgps work pension. 

I'm in the LGPS work pension scheme and have an AVC pot too (still contributing to both) so am very familiar with it but I'm struggling to understand what you are actually trying to achieve?

The 5 years to bridge a gap.  What gap?  Until you can take your state pension?  

From what you have shared:    

You intend to retire aged 62 with an LGPS pension of £22k per annum (this is post actuarial reduction?) and an AVC pot of £100k. 
Therefore when you retire your pension income is £22k per annum and you have a £100k AVC cash pot (100% tax free AVC pot to use as you wish) which you can dip into as you wish over the next five years (as this is now held by you in ISAs and savings accounts) until you reach the age of 67 when you will also receive your state pension.  

You do realise that you need to take your AVC pot and your LGPS pension at the same time?  

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Not relevant to you but for other LGPS members reading this:  

You may wish to take your LGPS nearer to your state pension age to reduce the actuarial reduction but you may still wish to retire aged between 60 to 62.  Consider contributing to a SIPP and draw that from say age 60 to 65/67 (taking advantage of the 25% tax free amount and the 75% taxable amount being covered by your personal tax allowance).