Annuity and Part Time Work

bigbazza23

G’day folks,

Is this the only way?

I need 4k net a month. My boss has asked me to go part time reducing my pay to 40k a year. This is based on 18.75 hours a week.

I have just turned 55 and find the thought quite appealing. He needs a headcount reduction and is asking all the old timers if they can go part time to prevent redundancies.

My options are varied but I’d like to explore the idea of Sal sac to the minimum wage and back filing the DC.

Current DC sits at 980K. I have a deferred DB from my previous employer. This generates 20k at 55 or 16k plus 100k TFLS.

I am considering pulling the full 268k from the DC and DB leaving behind 812k DC and 16K a year.

I would use the remaining 812K to purchase an RPI escalating annuity. 32k a year VP 100%.

If I bolt the two together I will generate 48k pension plus the NMW for 18.75 hours a week.

This combined exceeds my 4K net goal without triggering the MPAA or paying NI.

The 268K would pay off all debts including mortgage.

i

Any thoughts most welcome. Thanks in advance.

Woodstok2000

I'm definitely not an expert, but wouldnt all the above income be taxable, so you'd end up with about £3800 per month from a £60k annual income?

Albermarle

Not sure of the logic of giving up DB pension to buy an annuity. Unless maybe the terms were more suitable for your situation.

RogerPensionGuy

Plenty of options available it looks like.

My initial pick up is how & when you activate the DB & DC pots, this bit looks crucial in my head.

DB pot. Is taking the max TFLS out a good DB plan best option, does it loose much overall value by taking TFLS reference spouce potentially benifts etc?

DC pot. This is a large pot of wealth and the annuity sure provides a big chunk of security for the next 35 to 45 years hopefully.

If you activate both pensions, then topping up a DC SIPP pension whilst still working via Smart looks a no~brainier.

Reference the DB scheme, it's value will just tend to roll up I'm guessing, however the TFLS commutation rate my move about, but as the DB value rolls up, I'll guess the 100K TFLS will probably be always avaliable, if it dropped, your topping up another DC SIPP, so can always achieve the 268K TFLS goal I'll guess.

Maybe your biggest trickiest move is just when you activate the big DC SIPP pot.

If DC SIPP pot is currently deep in the markets it may go up or down and many outputs are saying we should not be surprised if we see a big old correction anytime soon, so beware.

Now on to the current hot potato in my head being annuities, if today we are in the the middle of 20 year annuity peak(2016~{2026}~2036) then grabbing an annuity in 2026 could be that beautiful goldilocks zone, there's plenty of information on annuity rates on here and the Internet, so this is probably my biggest pointer, do your research and hopefully achieve annuity peak zone.

I used 75% of a DC SIPP pot to get an annuity a few months back as I felt we maybe in the annuity goldilocks zone, I've parked up the DC SIPP in money markets and continue to check annuity outputs, if they eek up a bit more I'll probably maybe get my 2nd and last annuity, I got an initial 5% plus output at age 65ish with RPI, I took value protection 100% as reduction was low, I looked at various guarantee periods, but they took too much value away in my head.

Cheers Roger.

bigbazza23

Many thanks for your comments so far. It’s much appreciated.

Linton

What are you needs/objectives? It is impossible to assess a strategy without knowing these.

- how much income will you need for ongoing expenditure? eg how much money are you spending now?

- spouse/dependents - what happens if you die early?

- inheritance for relations, charities etc?

- attitude to risk?

I dont see any advantage in paying for more ongoing income than you would expect to need over the long term. You may wish to leave a significent amount of excess money invested to provide future flexibility and large one-offs.

Your circumstances will change when you eventually stop work completely and again when you start receiving State Pension. Perhaps you may want to base your annuity on your situation after SP age and reassess nearer that time rather than committing now.

ali_bear

The plan you have described leaves you with a solid income for life, one which many would envy. But you have used up all of your lump sums in paying off mortgage and other debts. Have you any other assets to draw upon when you need a larger amount of money for whatever life events get thrown your way? And don't forget your income needs will change (especially once you're over 80 ish).

Have you got any significant non-pension savings you can draw upon now?

If you're going to exceed the maximum tax-free lump sums allowance, you should probably minimize the PCLS taken from the DB scheme, if you have that flexibility in the T&C's, in return for greater income. But check what the inverse commutation rate is (income gained for lump sum given up).

What would a redundancy pay-off look like for you?

Not saying this is likely, but consider the scenario where you accept the much reduced hours and income, then redundancy happens anyway a year or so later? Will this reduce any redundancy payout you would be entitled to then?

bigbazza23

In answer to the comments so far,

• no desire to leave a legacy.
• VP100% was chosen as protection.
• I have a very low tolerance for risk and prefer hard wired income.
• PT would be temporary and any redundancy packages would be based on FT equivalent.
• SP is maxed so no need for further NI contributions.
• 100k would be left after mortgage and debt settled.
• Refilled DC pension would amount to 180k after 5 years with a fair wind

RogerPensionGuy

Just two more points pop in my mind.

After activation of both current pensions and working income puts you way in to the 40% tax, obviously filling a DC SIPP pot via smart sounds good.

1. Maybe the 3 X small pot rules could be a little helpful.
2. Maybe, but very unlikely IMHO is the TFLS 268K/1.073M will be raised.

Just a little housekeeping item.

I still feel with the 800Kish annuity you looking towards and it being such a big % of your guaranteed hard income, finding the sweet goldilocks time will be one of the biggest drivers.

Funnily enough today an annuity broker called me up seeing if I was ready to do an annuity as I've previously got quotes in the past with them. I asked him if he felt annuity rates are more likely to be flat, go up or down in these next two year, he was a bit cagey, but sorta said agreed in conversation that rates are currently in a high zone historically speaking, so less possibly they will keep creeping up, remaing flatish feels likely for now and going down possibilities are always on the table, so pretty open book in my head.

DRS1

A few thoughts

You say you want an income of £4k pm net. The pension and annuity set up you are proposing will give you £4k pm gross. The gap may be made up by part time work and then by state pension but will there be a gap between the end of work and that start of the state pension?

Starting a DB pension at 55 is very young. That means that the early retirement factor applied will be heavy. Have you done the sums to see what the impact would be of waiting till you are older to start the DB pension? Sometimes getting the money sooner is better financially (at least until you are in your late 70s say) but sometimes you find that waiting gets you an income which is closer to what you are looking for even if you don't get it for as long.

You mention VP100%. Is that value protection? Is that to benefit a spouse or other partner? Is the annuity going to be a joint lives annuity or a single life annuity? I could be wrong but starting at 55 you may have exhausted value protection by the time you are 80. If you do have a spouse or partner then a joint lives annuity may be better. Of course I may be making some unwarranted assumptions there.

Trying to time annuity purchase so you hit the top of the market will be fun but is it sensible in practice? When I bought an annuity in 2024 it was all "the rates are very good now". I dare say I would have been better waiting till 2026. Don't make your decision based on annuity rates alone, make sure you are doing it because it is overall what suits you.

You do not say how your SIPP is invested. If you are going to be buying an index linked annuity then one thing to think about is buying index linked gilts in the meantime. They will tend to move the opposite way to index linked annuity rates. You may not be able to get it exact but it could be a way to lock in today's rates. The theory is that if the rates go down the ILGs will go up and if the rates go up the ILGs will go down but either way the pension pot should be able to buy the same level of annuity.

Of course you could just leave the investments the way they are and start the annuity purchase. I did that in 2024 and found I was checking the value of the pension each day while waiting for the annuity purchase to go through. Up down up down. I wouldn't recommend it. Don't look at the values.

With the level of pension pot you have have you thought about splitting the annuity? You could maybe have some of it as a level annuity to get your level of initial income to where you want it to be (keep the bulk of it as an index linked annuity). Or maybe a fixed term annuity paying an amount equal to the state pension for the period up to state pension age . This is just harking back to the potential gap between the end of work and the state pension age mentioned earlier.

If you are hitting the Lump Sum Allowance as you seem to be then I agree that getting it out of your pension asap is a good idea. You say you will have £100k of the lump sum "left" and you are going to need to think about what to do with that. It is too much to get it straight into an ISA. So premium bonds? Or an index linked gilt ladder? Or just invest it in whatever it was in in the pension? If you do the latter bear in mind it is more complicated from a tax and record keeping point of view than when it was in the pension and you are going to want to get it in an ISA soonest.

bigbazza23

thanks again for reviewing this.

My 4k net per month will be established from day one and rise with RPI.

When PT ends I can then extract from the back filled DC fund.

Hopefully DC fund does not become exhausted before the SP takes over.