Pension recycling query

Zolablue

I apologise if this has been asked many times before but I tried searching the forum for "recycling" and it came up with a lot of non-pension related threads!

Anyway, I am rapidly approaching my 60th birthday and have a small pension pot with Scottish Widows that is due to be available next month and I need to decide what to do. I started this fund when I was 19 but only contributed to it for about 18 months - so it's not massive. I have £17,500 that has a GAR of 9.8% and there's another £3000 that would be at general annuity rates.

If I take the 25% tfls from the fund then it comes out of the total (i.e I can't just take the non-gar amount). My initial thought was to take it all as an annuity and pay the monthly income back into a SIPP until I actually retire but I am now wondering whether taking the tfls (approximately £5000) out and putting that into a SIPP and also adding the reduced annuity amount into the SIPP. I've tried reading the Government website about recycling rules and, as far as I can tell, it would be ok as long as I don't have more than £7500 in tax free cash to put back into a pension - but I'm not sure that I have understood that correctly. Obviously I don't want to break any rules so can someone more knowledgeable in these matters than myself, please tell me whether putting this £5000 into a SIPP would be within the rules or not?

Also, I would appreciate any thoughts on my 2 options (taking tfls or using it all for annuity) as it may be a moot point if everyone says "you'd be mad to take the tfls!!

Just for further information, I am married with an adult daughter (in case that makes any difference). Thanks

eskbanker

I tried searching the forum for "recycling" and it came up with a lot of non-pension related threads!

Top tip: you can filter searches to return only results from a specific board, so to narrow down search results to those posted on the pensions board, you need to select the 'threads' button (no, me neither), which then displays a 'category' filter, from which you can pick this board via the dropdown list. Hardly intuitive but effective when you get the hang of it…

DRS1

There is handy note on recycling with a flow chart which suggests you may be OK but here it is

Recycling of tax-free cash & pension recycling rules - Royal London for advisers

Obviously watch out if you have other pensions which you will be taking soon.

On a separate subject you mention a GAR with SW. Have you got annuity quotes for that? I ask because the GAR I had with SW stopped when I got to my selected retirement age. So if I applied for an annuity starting the day after my SRD the GAR did not apply. So I would suggest getting quotes now for an annuity starting on your SRD. Those quotes will hold good for a period of time (9 months I think but maybe it is less long now - it was certainly longer than the normal quotes would have lasted)

Also check what rate you get if you choose different types of annuity. I imagine the rate you have is for a flat annuity. You may be able to flex the annuity - eg make it an increasing annuity but do check that. In my case if I chose an annuity increasing in line with RPI the GAR would be lost. But increasing at a fixed rate (eg 3% or 5%) was OK.

Of course the fact that that was how the GAR I had with SW worked doesn't mean that is how your GAR with SW works. But those were a couple of catches I thought worth mentioning.

af1963

GAR of 9.8% - is that at age 60 ? Inflation linked? If so, that's a very good deal as an annuity. Even as a level annuity, it's a good bit above market rates.

Combining that with the £3k that would get commercial rates (4.5% or so) you'd be averaging a 9% rate.

Choosing to take 25% of the £20500 value would reduce the resulting annuity from about £1850 to about £1380. So you'd get £5100 tax free cash in exchange for giving up £460 per year for life.

(You'd lose some of that extra £460 to tax, although if you pay it into pensions while you're working, that will get it back as tax relief - how much you'd lose once retired depends on your tax rate then.)

Quick calcs: Taking lump sum, you could put 5100 in the pension followed by (say) 7 payments of the reduced 1380 annuity. That puts 14760 into a SIPP. Or alternatively, no lump sum and put 7 lots of 1850 into the SIPP, giving 12950 in the SIPP.

But if you've taken the lump sum, the ongoing annuity is £460 less, for life. That extra £1800 wouldn't be nearly enough to buy a further annuity to make up the £460 annual gap. ( Even buying a level annuity at age 67, you'd currently get about 8% so the extra £1800 would buy £144.)

In practise the lump sum option should also benefit a bit from having more of the money invested earlier, and will grow proportionately with investment gains - but it's unlikely to treble the return.

Zolablue

Thanks af1963, that's helpful.

I was working on the numbers myself and wondered which would work out better. My initial thought was to keep it all in an annuity but then ran the numbers taking the tfls.

My calculations could be wrong but I worked out that it would take (approximately, depending on the non-gar rate) 11 years of the higher rate annuity to make up the lump sum - not taking into account any return on investment from the £5000.

I guess it depends on whether I wanted the security of a regular income or take my chances with a SIPP.

Edit: just for clarification, if I took the tfls and reinvested into a SIPP, I wouldn't be looking at getting an annuity with it when I retire, it will be added to my other pension funds that will be used via drawdown

Zolablue

Thanks DRS1 for your input. Yes, the GAR expires the day after my 60th birthday. I contacted SW a few months ago and was told that I should phone again within 6 weeks of my "retirement" date to get proper figures, so I will phone them again next week.

I believe that the GAR is flat rate so I will need to look at any rates that they can do for offering an annually increasing sum.

Thanks for the link. It appears that, if I did opt for the tfls then I would be ok with HMRC.