Income drawdown vs annuity purchase at retirement

atush

I completely agree with the above, use your DC scheme to replace income and leave your DB pension. Your wife could do it as well from the cash pile. at 5% a year each, the commutation factor means you should leave these pensions to 65 or as close as you can get!!! this is the best return you can get from yolur money, to preserve 5% a year indexed income for each year you delay to 65.

As for the State pension, better than a forecast is a statement of all your qualifying years and your s2p if any built up. the forecast may very well be based on the SP today, not the new flat rate one.

jamesd

As kidmugsy and atush have written, delay taking your defined benefit pensions until as close as you can to the scheme's normal retirement age and try to avoid taking higher than normal lump sums. The reductions for taking a defined benefit pension early are seldom a good deal and the same usually applies to taking a larger than default lump sum. Some schemes even make it a good deal to reduce the lump sum.

Don't buy normal lifetime annuities yet. They don't do what you need: providing a temporary boost to income for a while then nothing more once your final permanent income starts.

Instead of normal lifetime annuities better product choices are:

1. term annuities. These pay out for only a specified time, say five years. They don't pay out much more than the purchase price but they do deliver high rate income for the limited time it's needed for.
2. Drawing down an investment pot, from either personal pensions or from money outside pension pots.

You appear to have so much money available outside pension pots that drawing down that money would be the sensible way to go.

No need to consider flexible drawdown, though once we know the final rules for the proposed changes to let anyone draw unlimited amounts, like flexible drawdown but even more flexible, that might be a useful thing to do to reduce your total tax bill. The reason it might reduce the tax bill is that you might have unused personal income tax allowance. Taking enough capped or new rules income from the pension pot to use your personal allowance would probably be a good idea.

If you do want to use annuities you're both really too young to be close to the optimal buying age at the moment. That doesn't really start to become ideal until above age 75-80. However, if you do want to do it, buy only enough to boost your final income to your target level. Final being once all of the work pensions and the state pensions are in payment.

Forget the £24k secure income requirement. The plan is to abolish it from April 2015 and let everyone have more flexibility than the current flexible drawdown setup does, with no minimum assured income requirement at all. The flexible drawdown income requirement has already been reduced from £20k for each person to 12k as one step towards this. It just isn't worth acting in March when by waiting until April you get more flexibility, particularly if that causes you to buy annuities unnecessarily.

kidmugsy

One of your problems is going to be emptying your DC pot while avoiding 20% tax to the maximum extent. If you defer your DB pension to 65 (or even later if they pay an incentive for that - rare but not unknown) you could take £14k p.a. in a phased drawdown, with £3500 tax free as a lump sum and £10500 tax free as a user of the personal allowance. Hold enough of your huge cash pile in your own name so that it uses the £5k p.a. 0% band for savings income: bingo, £19k p.a. tax free.

For your wife the best plan is less obvious, since I don't know anything about the choices available for taking the AVC. If you're both really keen to exploit her personal allowance then drawing her DB pension early might make sense - you just have to do some arithmetic to compare options.

kidmugsy

AND ANOTHER OTHER THING. About the AVCs: note paras 2.10 to 2.16.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299286/dwp024-apr-14.pdf

Offgrid

kidmugsy wrote: »

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?

My DB pension is USS which is a bit complex. For some years of my service USS was actually intended to mature at age 60 but for the rest it has been 65. It's hard to be sure (and USS won't give me an estimate more than 9 months out) but I guesstimate the penalty for taking it at 61 would indeed be at least 20-22%% i.e. ~£8k pa with £24k PCLS or £9.3k pa with no lump sum in 2019.

kidmugsy wrote: »

One of your problems is going to be emptying your DC pot while avoiding 20% tax to the maximum extent. If you defer your DB pension to 65 (or even later if they pay an incentive for that - rare but not unknown) you could take £14k p.a. in a phased drawdown, with £3500 tax free as a lump sum and £10500 tax free as a user of the personal allowance. Hold enough of your huge cash pile in your own name so that it uses the £5k p.a. 0% band for savings income: bingo, £19k p.a. tax free.

Let me see if I understand what you're saying. My DC is with Blackrock so I move it to a company that offers phased drawdown, right? Then take out £56k over 4 years while pot is also still growing so I end up with say £100k? Pad that with £5k pa from our savings (£190k NISAs/NS&I, £170k 1 or 2 year Fixed Term). Then in 2019 I get my SP plus USS £9.3k pa (indexed) plus say £4k pa from DC? Have I got it right? Key thing here is what will my SP be given I was contracted out? Would anyone care to make a guess? Does it go to zero? Or halve? Or just lose some percent from the £7.5k pa?

kidmugsy wrote: »

For your wife the best plan is less obvious, since I don't know anything about the choices available for taking the AVC. If you're both really keen to exploit her personal allowance then drawing her DB pension early might make sense -

Her £6.5k pa DB is run by South Yorkshire Pension Association and the £55k linked AVCs are the SYPA AVC scheme run by Scottish Widows. I believe the options are: an annuity from SW; an additional annuity from SYPA; purchase of extra years in the LGPS; use it to increase lump sum (to the maximum = £47.5k, leaving a balance of £15k to do one of the other things with); transfer it all to another pension provider. Not mentioned this before but she also has £1.5k pa of other DB pension.

kidmugsy wrote: »

- you just have to do some arithmetic to compare options.

Can you indicate a couple of options I could look at and compare?

And thanks for the link to the SP Deferring document. Not sure what you mean by "paras 2.10 to 2.16" though?

atush

Let me see if I understand what you're saying. My DC is with Blackrock so I move it to a company that offers phased drawdown, right? Then take out £56k over 4 years while pot is also still growing so I end up with say £100k? Pad that with £5k pa from our savings (£190k NISAs/NS&I, £170k 1 or 2 year Fixed Term). Then in 2019 I get my SP plus USS £9.3k pa (indexed) plus say £4k pa from DC? Have I got it right? Key thing here is what will my SP be given I was contracted out? Would anyone care to make a guess? Does it go to zero? Or halve? Or just lose some percent from the £7.5k pa?

Given you have jumped on someone else's thread ( ok a bunch of peoples lol), and we are a page back or so now,

how do you expect us to memorise all your figures? So that we know you can take 56K out and it is still growing and at what rate and what it is invested in and the projected growth rate?

Sometimes I think, you think, we have a crystal ball lol

kidmugsy

Offgrid wrote: »

And thanks for the link to the SP Deferring document. Not sure what you mean by "paras 2.10 to 2.16" though?

Aha, my fault: I linked to the wrong document. Here's the right one.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332714/pensions_response_online.pdf

It's now got to the stage that I think you should take atush's hint, start a thread of your own, and include the facts that we have, if I may say so, had to extract from you. Restrict yourself to the remaining under-explored areas such as your wife's position, and, in particular, you must tell us which of you currently has which assets and in what form. I imagine that you already have plenty of food for thought about your own position.

Offgrid

atush wrote: »

Given you have jumped on someone else's thread ( ok a bunch of peoples lol), and we are a page back or so now,

Do you mean I should start another Income drawdown vs annuity purchase thread?

atush wrote: »

how do you expect us to memorise all your figures? So that we know you can take 56K out and it is still growing and at what rate and what it is invested in and the projected growth rate?

Sometimes I think, you think, we have a crystal ball lol

Previous reply was to Kidmugsy and I tried to make it pretty much self-contained.

kidmugsy

Offgrid wrote: »

Do you mean I should start another Income drawdown vs annuity purchase thread?
.

No. There's not the remotest chance that an annuity purchase would suit you.

jem16

Offgrid wrote: »

Let me see if I understand what you're saying. My DC is with Blackrock so I move it to a company that offers phased drawdown, right?

Yes if you do so before April 2015. After this, with the new pension changes, it won't necessarily need phased drawdown as you should be able to withdraw what you like when you like.

Then take out £56k over 4 years while pot is also still growing so I end up with say £100k? Pad that with £5k pa from our savings (£190k NISAs/NS&I, £170k 1 or 2 year Fixed Term). Then in 2019 I get my SP plus USS £9.3k pa (indexed) plus say £4k pa from DC? Have I got it right?

Seems right, yes.

Key thing here is what will my SP be given I was contracted out? Would anyone care to make a guess? Does it go to zero? Or halve? Or just lose some percent from the £7.5k pa?

It depends on how long you've been contracted out. However let's go with worst case scenario and you're like me who has been contracted out all of my working life. With the transition stage your state pension will be worked out on what you would have for under the old rules against what you would get under the new rules. The higher of these two calculations is what becomes your foundation amount and that's what you'll get.

Under the present rules, if you have 30 years NI contributions you are entitled to the full basic state pension which is around £113pw from memory. Having been contracted out there is no additional pension from SERPS or S2P (state 2nd pension) so your entitlement is £113pw.

Under the new rules you will need 35 years NI contributions for the full flat rate pension. However those who have been contracted out will lose some of that with a deduction that has yet to be announced. However if it falls below the £113pw (or whatever the basic state pension will be in April 2016), under the transition period, you will get the higher amount.

So worst case scenario is that you will not have less than £113 pw and you may have more. You may even have more than the flat rate pension if you do have some entitlement to SERPS or S2P. This is why it will be important to get a state pension forecast. Everyone will be notified of their foundation amount under the old scheme around April 2016 I believe.

Her £6.5k pa DB is run by South Yorkshire Pension Association and the £55k linked AVCs are the SYPA AVC scheme run by Scottish Widows. I believe the options are: an annuity from SW; an additional annuity from SYPA; purchase of extra years in the LGPS; use it to increase lump sum (to the maximum = £47.5k, leaving a balance of £15k to do one of the other things with); transfer it all to another pension provider. Not mentioned this before but she also has £1.5k pa of other DB pension.

There may also be the option of using her AVC pot to draw down in the same way we're suggesting for you and leave her LGPS pension until normal retirement age. However it's not clear yet whether AVCs will come under the new rules or not. It's always possible that she could transfer the AVC pot to somewhere that did allow it.