Income drawdown vs annuity purchase at retirement

smiler2

hi Linton, I agree, that is why it is not suitable for everybody.

My feeling is that with me and my partner's projected total net after tax pension income at age 66 of ~ £60k pa of mostly inflation linked pensions without my SIPP, importantly as you say, I think we can still afford 1,2 and 3.

I am really just trying to get the best value from my proposed £200k SIPP and I really appreciate everybody's comments at a time when annuities are terrible.

I was thinking ot getting a Nationwide 100p 7.859% 2030 NABB PIBS, one unit is an eye-watering £100k last traded at 80p, not sure that price is accurate right now or if any are available to trade, but at 80p it gives a fixed return of about 10% which will certainly do for now. In three years it will have bult up enough cash on its own to fund the 25% tax free lump sum in the sipp so I could start flexible draw down of just the interest it pays.

Linton

smiler2 wrote: »

...
My feeling is that with me and my partner's projected total net after tax pension income at age 66 of ~ £60k pa of mostly inflation linked pensions without my SIPP, importantly as you say, I think we can still afford 1,2 and 3.

I am really just trying to get the best value from my proposed £200k SIPP and I really appreciate everybody's comments at a time when annuities are terrible.

.

Have you made a financial plan for your retirement? How much income do you need to maintain a standard of living you would consider acceptable?

If that required income is around or less than £60k why do you need more pension? What would you do with the extra money? Save it? Give it to charity? Maximise the amount you pass on to future generations?

If £60k isnt sufficient, what would be? Is it more or less than what an annuity from your projected SIPP would provide?

My reason for asking is that it seems possible that the restrictions of a pension and the eventual loss of the capital (or its high taxation) would be more undesirable than paying extra tax now and saving or investing the spare income outside a pension.

smiler2

hi Linton, good point, my minimum is £15k pa net to exist with no frills. A globally dispersed family means £50-60k is preferred.

Reason for SIPP, like most people I prefer to spend what I earn rather than give 40% to HMRC to spend for me. With 40% tax relief, pension saving still good way to do that.

Why...a hedge against bigger then expected inflation, help grandkids through college, just more choices.

One final objective is to ensure when I retire that we do not pay 40% tax any more, so personally that means an upper limit of £50k pa in retirement right now, £40k income + £10k capital gains with a dash of tax free ISA cash and ISA equity income..

davidjr_2

I have been notified that the Goverment has changed rules on the value by % allowed to be taken on private pension, the restriction is 2.5% That in my case would mean a drop in my pension by over half, is this correct? If so will that have major impact on choice of pension?

Thank's to jamesd, I have had meeting with local MP and used information from your 388 and 396. I feel he was surprised at the effective halving of drawdown income and he has agreed to ask the questioin of the Minister, maybe a bit more lobbying of MPs will speed a sensible outcome!

jamesd

Depends on what you mean by private pension. If you mean capped income drawdown/unsecured pension using a personal pension then there have been three changes that have had the effect of reducing the income cap level:

1. The GAD calculation limit was reduced from 120% to 100% of a nominal annuity equivalent value in April 2011.
2. The GAD calculations for various ages have been adjusted a bit, some up, some down, in the summer of 2011.
3. The GAD calculation is based on 15 year gilt yields as a proxy for annuity yields and a combination of fiscal easing and flight to the Pound as a safe haven have caused those to fall to record lows, well below the typical 4.5-5% that's been normal. The December 2011 value being used now was 2.5%. The lowest from 1999 through 2008 inclusive was 4%.

The current situation that bars people from taking out even the income that their investments generate with no reduction in capital is clearly ridiculous and there's speculation that the Treasury will change the rules, hopefully to something more sensible for drawdown that doesn't continue to pretend it's an annuity or related in any way to annuities in what levels of income can be taken. Given available income levels, anything less than around 6% of capital taken as income is going to be forcing some people to accumulate funds instead of drawing them down.

The workaround for those not yet retired and intending to retire later than 55 is to start drawdown as soon as they reach 55 and invest the income until they need it. They also have the option of recycling the income into more pension contributions to get extra tax relief if they prefer.

The limit is recalculated every three years and things will hopefully be normal in three years. A recalculation can also be done when more drawdown money is added to a pension pot and that's a trick that can be used to get updated limits if things have improved a year or two years from now. You can see the effect using this GAD limit calculator. There's also one from Prudential in spreadsheet form that includes a table of past gilt yields so you can experiment with the varying rates to see the effect.

For some examples here's how £1,000 in a pension pot would have its income cap set for a man at various gilt yields and ages, 17/1/2012 as the reference date:

2.0% 55:£41 57:£43 58:£44 60:£46 65:£53 70:£62 75:£77 80:£101 85+:£140
2.5% 55:£44 57:£46 58:£47 60:£49 65:£56 70:£66 75:£80 80:£105 85+:£143
3.0% 55:£48 57:£49 58:£50 60:£53 65:£59 70:£69 75:£83 80:£108 85+:£147
3.5% 55:£51 57:£53 58:£54 60:£56 65:£63 70:£72 75:£87 80:£111 85+:£150
4.0% 55:£55 57:£56 58:£57 60:£59 65:£66 70:£75 75:£90 80:£115 85+:£154
4.5% 55:£58 57:£60 58:£61 60:£63 65:£70 70:£79 75:£93 80:£118 85+:£158
5.0% 55:£62 57:£63 58:£64 60:£66 65:£73 70:£82 75:£97 80:£122 85+:£161

On the 4.5 line the 65:£70 entry means that at a 4.5% gilt yield a man would be able to take up to £70 income a year per £1000 in the pension pot.

Another option that may avoid the GAD limit issue is to use a "scheme pension". Those use a personal estimate of life expectancy instead of the generic GAD values. The costs mean that they are unlikely to be suitable below £50,000 and even that is small, over £100,00 is more likely to be cost-effective in normal conditions.

Since this post was originally written the factor has changed from 100% back to 120% again, so multiply values in the table by 1.2 to get current values. Or use one of the calculators if you want actual values, not just a broad overview of how income changes with age and gilt yield.

davidjr_2

jamesd

Thank you for that really helpful information, this change looks likely to have serious effect on drawdown pensions, as it has done in my case.

Polymath

I hope it's OK to insert a new question into this very long thread?

Situation:

• In about two years' time (aged 67) I'm guessing that my current job may finish, so I will probably retire then
• I already have a final salary pension in payment which is above the minimum for flexible drawdown
• I will be deferring my state pension until age 67 (or possibly later)
• A personal pension is expected to return about £50K when I retire
• There is no need for me to provide for any dependants

I see two main options with the personal pension:
a) obtain an impaired life annuity (for which I would qualify) with the best provider
b) transfer the proceeds of the pension to an organisation which would allow flexible drawdown (and incur an initial and annual charge for the privilege)

There are many types of annuity, of course, and a tax-free lump sum could be taken with either of my options.

Unless I have mis-read the various financial websites I've looked at, it would appear that I could draw down as much as I like, exhausting the pension proceeds as rapidly as I like (being careful to avoid any change in tax band which could result from over-enthusiasm!).

Am I right here, and what are the factors that should be considered when choosing between the two options? Are there any better options?

jamesd

You have at least one better option. You can go into capped drawdown now to immediately extract the 25% lump sum and get some of the capital out by income drawdown before actual retirement. That will reduce the amount drawn later and hence reduce the chance of reaching higher rate income tax.

You can also recycle the lump sum and ongoing capped income into new pension contributions. Note that there is a cap on recycling lump sums that won't be exceeded in this case but which may affect others. After making these contributions you can then take out another 25% lump sum when you retire. This will get you some more tax relief. When you go into flexible drawdown you can remove the rest of the money that was recycled, leaving a tax gain from the recycling.

If you don't need the capital, just continue with capped drawdown and recycling the income until you need it. The limit when not in PAYE employment is £3600 gross of pension contributions a year. When you need the capital take the accumulated 25% lump sum and go into flexible drawdown to get the rest.

I'm assuming you don't have an immediate need tor the whole amount. In which case it makes more sense to continue getting the pension tax relief for as long as you can and delay flexible drawdown until necessary. As soon as you enter flexible drawdown you bar yourself from ever getting pension tax relief again.

Whether an impaired life annuity beats drawdown would depend on just what the payout is. Sometimes impaired life payouts can be better than investments. For drawdown you do have a competing option that might just about make sense with £50k, a scheme pension. A scheme pension is a form of drawdown where an actuary works out the amount of income you can take based on your own health, a bit like an impaired life annuity. This may allow you a high drawdown rate without the use of flexible drawdown. The costs of a scheme pension start at around £750 because of the amount of work involved. Relatively few providers currently offer scheme pensions.

For any condition involving impaired life expectancy you can reasonably expect that delaying buying an annuity would result in more rapid increase in annuity payout rates than for a standard annuity. This may make it sensible to spread annuity buying over a few years if you go that route.

dunstonh

reported above for spam. new sign ups/single poster. This would suggest it is actually a self promoting spam by pretending to be a happy client. Why go through the process of creating an account just to sing the praises of some company. It doesnt happen.

Please press the spam button.

smiler2

The Pension Drawdown company seems expensive, £100k fund initial charge 3% and 1% pa....

I would review H&L charges, seem lower to me.