Do I want a TFLS?

Brie

Still trying to sort one of my work pensions and am currently trying to get an annuity.

So obviously if I take the 25%TFLS my annuity would be less. And I'd have this nice lump added to my (ok, our) savings account. Don't take the TFLS and the annuity would be more. All that makes sense.

I (well I should say we as I've added his name to the account) have investments that have been paying out nicely. We don't have any massive travel plans, house is in good shape, nobody to inherit anything (unless we get some cats), don't need a new car (maybe in a few years) and enough in other pensions to keep us ticking along. Yes he would like to buy that turntable he saw that costs a mere £35k but I've said no. I might allow him to buy a newer, better, pricey stylus instead.

I do all the financial stuff here and am having less and less a desire to do more than make sure there's enough in the current account to pay the bills. Worse case scenario if money gets tight in a decade or two we'll be going for something like equity release or downsizing.

Now without this sounding like looking for an answer to "how long is a piece of string?" is there any other reason I should or should not take a TFLS?

Dazed_and_C0nfused

Some people would consider turning tax free income, albeit a one off, into taxable income a little troubling.

But not everyone will be against it. What tax rate will this annuity end up being taxed at?

itsthelittlethings

https://forums.moneysavingexpert.com/discussion/comment/81913784#Comment_81913784

If you get more taxable income it may still be sensible to take it that way.

poseidon1

See no reason why you should not take the TFLS now even though you have no pressing need for the cash. It can help build up your joint ISA 'war chest' to create a larger source of non taxable income.

If you ever feel a future need for the certainty of an annuity, there are always PLAs ( purchase life annuities) available if required.

Brie

no matter what all income will be at a lower rate. I'm not lucky enough to have earned tons.

no ISA so no need to build that (when I say no ISA I do have one that has £10 in it, I've never needed any more ) (the invested income isn't in the UK so no way to ISA that until I repatriate it which I've no incentive to do at this point)

Secret2ndAccount

Let's work with £160k:

Plan A: You send £120k into an annuity. This comes back to you bit by bit and it seems that you will pay 20% tax on all these payments. That's fair, since you would have been taxed if you took this money out of the pension by some other method. You receive a TFLS of 40k. You immediately put 20k into your ISA and 20k into his, and invest it back into the same kind of investments it was in when it was inside the pension. All future growth inside the the ISA is tax free. All ISA withdrawals are tax free. No tax, never.

Plan B: You decline the tax free money and push the whole 160k into the annuity. Of course, you receive proportionately more, but it's all taxable. So, bit-by-bit, you pay 20% tax on the spoils from this 40k. It's equivalent to paying 20% tax on that 40k up front: it wastes £8k. You might choose to do this because you don't want to deal with the hassle of managing your pension/ISA. Whether you think that's worth 8k is up to you.

Plan C: You take the 40k and immediately buy a Purchased Life Annuity (an annuity bought with cash, not from a pension). These are taxed at a lower rate in recognition of the fact that each monthly payment is partly just the cash that you put in. That part is not taxed. Part of your monthly payment comes from growth in the investments at the insurance company. That part is taxable, just as interest from the bank might be taxable. You end up paying maybe 10%ish tax (it's all worked out for you), so going down this route costs you more than using ISAs, but less than plan B. When I searched for a PLA I couldn't find what I wanted, and I got offered a poorer deal than an annuity from my pension, so I ditched the idea. Your case could be different.

You could set up a gilt ladder as an alternative to a PLA. That's a hassle once, but largely runs itself after that. This has the advantage that it can be tailored to your wishes. The disadvantage is that it eventually runs out - an annuity pays out forever, which might be important to you.

Brie

@Secret2ndAccount - amazing! Plans A&C are worth further consideration. Much appreciated.

DRS1

There are threads on here about whether people in DB pensions should take any tax free cash. That usually comes down to a question of what is the commutation rate. You can do a similar sum where you are purchasing an annuity.

Let's say your annuity rate is 6% and you have a TFLS of £40k that would give you gross income of £2400. £40k/£2.4k is 16.666:1 Not a brilliant commutation rate. If you look at a net income of say £1920 then the commutation rate goes up to 20.83:1. Better and I think some people would take that.

Obviously we don't know what your annuity rate is but maybe this could be a way to think about it.

af1963

In addition to the points made already: taking part of the value as an up-front lump sum, and then reinvesting it till you need it, allows more flexibility to choose when you want to spend it.

You might decide that you'd prefer spending a bit more in the early years of retirement while you can make the most of it. Taking it as a tax free lump sum at the start means it's there if you need it. Taking the higher annuity by not taking the lump sum, you're committing to spread it out as a series of regular payments for the rest of your life, so you can't later choose to dip into it for a large one off payment.

LHW99

And if that lump sum remains to grow in an ISA, you have the option of a PLA at any point in the future, not just immediately.