Income drawdown vs annuity purchase at retirement

dunstonh

Is it possible to re-invest drawn down income into a pension fund and therefore receive tax relief thus creating another stream of income in the future ?

it is, within limits, although often its not worth it. a) you reduce your death benefits on the crystallised fund by leaving them open to a tax charge which would not exist on uncrystallised funds. b) the charges are often higher on drawdown (annual fee usually exists). c) the income is taxable on the income withdrawal so putting it back just returns the tax you have paid (cancelling it out).

yelf

I havent read all of this thread so forgive me. But people should also consider Living Time and their fixed term annuity.

lamb1102

dunstonh wrote: »

it is, within limits, although often its not worth it. a) you reduce your death benefits on the crystallised fund by leaving them open to a tax charge which would not exist on uncrystallised funds. b) the charges are often higher on drawdown (annual fee usually exists). c) the income is taxable on the income withdrawal so putting it back just returns the tax you have paid (cancelling it out).

Well that makes sense, thanks for the quick response.

lamb1102

yelf wrote: »

I havent read all of this thread so forgive me. But people should also consider Living Time and their fixed term annuity.

Only just discovered these, it would be interesting to see what experienced pension people make of fixed term annuities.

jamesd

Fixed term annuities can be useful. They provide a certainty of a given income level. If a pension commencement tax free lump sum is used to buy one, then there are significant tax breaks, since much of the income is treated as return of capital and is tax free.

Taking the maximum GAD limit of 120% can be useful if taking an income before the state pensions or a work pension starts, since it can let you cover some of that currently unavailable income.

Living Time seems to imply that they were around at the start of this, but were only started in 2006, while annuities like this have been around for a long, long time. The guaranteed maturity amount that they write about seems like a complete waste of money that mainly serves to increase the amount of money that they manage and commission is paid on. Just keeping that amount of money outside their product seems likely to be a better option.

If an IFA was trying to sell me this product I'd want to know why they weren't using a simple term annuity for the income portion and keeping the rest invested. And why they weren't instead securing income and capital by buying UK government bonds (gilts) with fixed maturity dates that guarantee both the income and the capital.

lamb1102

Food for thought , thanks JD.

dunstonh

Personally, not a fan of third way products. They come from the US and are only offered by providers with a US background/input. Only three providers offered them and one has pulled out. This leads to a few concerns a) if they are so good why arent other providers doing them b) the market is unstable with only three providers and one withdrawing. Those concerns may or may not be right but it does put you on guard. There is also the potential to breach GAD limits on the underlying fund. I dont believe that has happened to date and is a theoretical possibility but one thing the events of the last few years have reminded us is that theoretically possible but unlikely events do occur.

I think they are a bit of a fudge. Drawdown is a higher risk transaction. If you say you accept the risk of drawdown but then go looking to go heavy into third way products then it draws a doubt on whether you really do accept the risk of drawdown.

yelf

With Living Time and LV you can take a 5 or 10 year annuity providing the same income as a standard lifetime annuity - and than at the end of the term you can apply again for another fixed or lifetime annuity, and the pot you have to do this will enable you to obtain "the same level as income" as you have been receiving. THe benefit here, imho, is that you will then have a higher chance of qualifying for an enhanced rate. i think the numbers are that 50% of healthy people aged 65 will quailfy for an enhanced rate at age 70.

The I2live and MGM plans i dont like

twentyfour11

Is it possible to take an Income Draw Down and invest the money in property? I am thinking of some Freehold Ground Rents (residential).

champys

EdInvestor wrote: »

A "purchased life annuity" can be bought with non-pension cash and has significant tax advantages over a pension annuity.

Interesting, I didn't know that - can you explain why an annuity bought with non-pension cash is more tax efficient? Or should I take that to another thread.