Income drawdown vs annuity purchase at retirement

kidmugsy

AND ANOTHER THING: there is a £5k p.a. 0% tax band above the personal allowance, reserved for savings income (e.g. interest but not dividends, nor pensions), which is lost pro rata as your non-savings income rises above the PA. It seems to me likely that your wife could consider Income Withdrawal (if permitted) to empty her AVC before her SP begins, and use that band. Perhaps it's possible that you could find a way to do it too (which might involve reversing my advice to hold cash in ISAs and equities outside).
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293747/Fact_sheet_template_-_10__tax_9.pdf

If you think about it, it also lets you pull off a trick such as taking a decent withdrawal from your DC pension every few years, and spending the other years as a 0% tax payer. The years when you do a drawdown would be the years to buy VCTs or EISs. Consider too which of you should own the equities, which the cash, if this trick is to be used to best effect.

By golly, I think I've solved your problem. My bill is in the post.

atush

I would open a DC pension for your wife, and put in as much into pension from her income as is left (ie 100% income into pension overall) it would then be boosted by BR tax.

And if your equities are under performing cash, then they may not have been invested int he right funds (ie high %equities unlike bonds/gilts) as markets have gone up substantially over the last few years. Bonds and gilts have dropped.

You could look to where markets are currently cheap (ie not UK) such as EM.

i'd at least open 2x S&S isas, as that is less than 10% of your cash pile. This money could be for retirement in 10+ years so you can take on more risk with it.

jem16

Offgrid wrote: »

Annuitising the £200k DC we could have £21k pa DB +DC pension income next FY. But we need £32k pa. In 2020 we'll have the SP taking our DB + DC + SP pension income to £21k+£7.5k+£7.5k=£36k pa, plus some indexation so say £38k - well above the income tax threshold in 2020. So my question re-phrased is: how do I best bridge the £21k (income) to £32k (required) gap now to minimise our exposure to income tax when our SPs kick in? This is why I started thinking about an alternative to a plain old annuity for my £145k DC fund.

I wouldn't necessarily think about using annuities unless you really want the guaranteed income. However a few things for you to find out about spring to mind.

Your wife's AVC pot. As suggested earlier find out if the AVC pot can be used to fund the tax free cash. Who is her DB pension with?

Your state pensions. You seem to be assuming the maximum flat rate pension. As both of you have DB pensions, it is likely that you have been contracted out for at least some of your working life. This will reduce your entitlement to the full flat rate pension. Have you had a state pension forecast recently to find out what you are due?

Your DB pensions. Are either of you taking them early or are you both at the actual retirement age for the schemes?

Your retirement adviser. Is this an IFA or what?

Offgrid

atush wrote: »

I would open a DC pension for your wife, and put in as much into pension from her income as is left (ie 100% income into pension overall) it would then be boosted by BR tax.

Atush, thanks for this suggestion. I think it was slowly dawning on me. Does this mean we should open a SIPP for her or something else? I know little about pension products beyond the difference between DB and DC.

atush wrote: »

And if your equities are under performing cash, then they may not have been invested int he right funds (ie high %equities unlike bonds/gilts) as markets have gone up substantially over the last few years. Bonds and gilts have dropped.

Global and UK trackers. I may have been cheated. Nothing I can do about now though. Ironically (and automatically: it was the pension plan's built-in decision) I caught a big wave in bonds which boosted my DC pension substantially 2010-2013. But overall I don't feel I am smart enough to play the equities/bonds game seriously.

atush wrote: »

i'd at least open 2x S&S isas, as that is less than 10% of your cash pile. This money could be for retirement in 10+ years so you can take on more risk with it.

Just to be clear - we're maxed out in ISAs even under new rules. We do have 2 Hargreaves Lansdown S&S NISAs in the £55k of equities I mentioned. Sorry for confusing everyone.

Offgrid

kidmugsy wrote: »

By golly, I think I've solved your problem. My bill is in the post.

Kidmugsy: You may well have solved it! I'll let you know when I fully understand what you are saying For that I'll need another read through and a think. Back in a couple of hours...

Offgrid

jem16 wrote: »

I wouldn't necessarily think about using annuities unless you really want the guaranteed income. However a few things for you to find out about spring to mind.

Your wife's AVC pot. As suggested earlier find out if the AVC pot can be used to fund the tax free cash. Who is her DB pension with?

Thanks for this tip. I'm not sure but I think it can be used as you suggest. I will check. It's with Scottish Widows.

jem16 wrote: »

Your state pensions. You seem to be assuming the maximum flat rate pension. As both of you have DB pensions, it is likely that you have been contracted out for at least some of your working life. This will reduce your entitlement to the full flat rate pension. Have you had a state pension forecast recently to find out what you are due?

Ah! The potential fly in the ointment... Yes we have been contracted out and no we haven't had forecasts. I assumed that as we were up to date on NI contribs we would get full pension but I must be mistaken. I just called for a forecast and they tell me they will get back to me on August 14th but also I can try calling them again this Friday (this seems a bit random). The agent could not give me any idea of the impact on our SPs. What does being contracted out do? Halve your SP? Reduce it to zero? Take off a few percent?

jem16 wrote: »

Your DB pensions. Are either of you taking them early or are you both at the actual retirement age for the schemes?

Both taking them early, me at 61, wife at 60. They are both based on retiring at 65 but the forecasts at the above early ages looked attractive to us and seemed like they would float our boat.

jem16 wrote: »

Your retirement adviser. Is this an IFA or what?

I spoke to Saga and they said they would send an adviser. I didn't check they were an IFA.

dunstonh

I spoke to Saga and they said they would send an adviser. I didn't check they were an IFA.

SAGA use a third party company. That third party company is actually quite expensive and bizarrely they charge VAT on top of their charges. However, seeing as they are having to pay SAGA as well as all adviser and the advice providing company, you would expect it to be expensive compared to a local IFA.

http://www.saga.co.uk/money/financial-planning/exclusive-saga-pricing.aspx

The website is very vague on the service. it does not mention independent. So, you assume they are not. It doesnt mention what restrictions they have. Small restrictions are not an issue if they are whole of market. However, if the restrictions are significant then you are paying over the odds for a restricted service and that is not a good idea.

SAGA have a track record of expensive, low quality options. For example, their annuity service was tied to L&G. Somewhat ironic that Ros Altmann campaigned for reform of the annuity market yet whilst she was Director General of the SAGA group they had such a poor quality option.

Offgrid

dunstonh wrote: »

SAGA use a third party company. That third party company is actually quite expensive and bizarrely they charge VAT on top of their charges. However, seeing as they are having to pay SAGA as well as all adviser and the advice providing company, you would expect it to be expensive compared to a local IFA.

http://www.saga.co.uk/money/financial-planning/exclusive-saga-pricing.aspx

The website is very vague on the service. it does not mention independent. So, you assume they are not. It doesnt mention what restrictions they have. Small restrictions are not an issue if they are whole of market. However, if the restrictions are significant then you are paying over the odds for a restricted service and that is not a good idea.

SAGA have a track record of expensive, low quality options. For example, their annuity service was tied to L&G.

Thanks dunstonh. I was told this visit would be free. I do know you get what you pay for, so I'm not expecting much. I don't think it can harm me to talk to them. I think the advice on this forum (also free) is alerting me to the potential pitfalls. I'll be interested to hear their overall plan for us and the kinds of product they suggest for it, but I'll do much more research before actually committing to anything.

dunstonh

I was told this visit would be free.

Virtually all advisers do not charge for the first visit. That is because they are not allowed to charge you until you know what the charges are and you have agreed them. Until the advice service provided is known it is difficult to know what the charges may be (you can ballpark figures a lot of the time but often you need to know what the advice area is before you price it).

I don't think it can harm me to talk to them. I think the advice on this forum (also free) is alerting me to the potential pitfalls. I'll be interested to hear their overall plan for us and the kinds of product they suggest for it, but I'll do much more research before actually committing to anything.

At least you know now that it is expensive and restricted. Don't commit to anything as a local IFA or restricted (but whole of market) adviser would likely offer better value from a wider selection.

kidmugsy

Offgrid wrote: »

Both taking them early, me at 61, wife at 60. They are both based on retiring at 65 but the forecasts at the above early ages looked attractive to us and seemed like they would float our boat.

Hold on! It may be to your advantage, since you are the one with the big DC pot, to defer drawing your DB pension to 65 and replace it by income withdrawal from the DC in the meantime.

How much do you lose for each premature year? 5% perhaps? Is there anything else you lose by taking it early e.g. life insurance? Does taking it early reduce the eventual widow's pension as well as the principal pension? The way to look at deferring your DB pension to 65 is to say that it's roughly equivalent to buying an annuity with whatever index-linking your DB pension offers. It's likely to be a quasi-annuity that pays distinctly better than any available commercially. If it isn't, then by all means draw it early.