When to buy annuity???

I_love_the_sun

I'm in my mid to late fiftys and in terms of the work life balance I am enjoying life. I have not worked for a couple of years and have no plans to do so.

A year ago my annual pension statement said I had a pot of £304,000

I have just phoned to get a current valuation, its about £280,000

Ouch!!!!

I dont need to buy an annuity for a few years yet.

The question to those a lot brighter than me on this subject is roughly how long do you think it will be before the "fund" jumps up in value and it will make it worth buying an annuity?

Regards

EdInvestor

What is the fund invested in?

You also need to look at annuity rates: are they likely to go up or down? You will get more as you get older, but how much does the fund need to rise to compensate you for missing out on that year's income, albeit at a lower rate.

It's now possible to take out 25% tax free cash but leave the rest of the fund invested.Have you considered that?Could be sensible, especially if you are wasting your tax allowance.

I_love_the_sun

Re your last paragraph.........explanation please.

I have made an appointment to see a IFA

Any details will give me more to ask/take council about

Thanks

Funds with Scottish Widows and Standard Life.

dunstonh

A year ago my annual pension statement said I had a pot of £304,000

I have just phoned to get a current valuation, its about £280,000

Ouch!!!!

Thats a tiny drop and not on the ouch scale. Its only just over 7% down and that is nothing. If you had phoned two weeks ago you may have found it was another £10,000 lower.

If you take the benefits now (in any form) then you reduce the death benefit and it may have an impact on your taxation and future income. Do you need the money now?

I_love_the_sun

.......I dont need to take yet.

I'm OK for another four or five years.

My "calculations" however show its possibly better to take now and reinvest the income.

If this is correct, do I take now or wait for a possible upturn in the stock market and therefore fund value.

Thanks

J

swiss69

Re the last paragraph bit you were querying earlier from EDInvestor.

It is possible to take upto 25% of a fund as tax free cash immediately and defer taking the income (Income Drawdown arrangement). If you opt for this your fund would remain invested until you decide to buy an annuity - normally sometime before the age of 75.

If you think this may be an option for you I would suggest you seek advice as this type of arrangement is not for everyone.

dunstonh

My "calculations" however show its possibly better to take now and reinvest the income.

Can you provide those calculations as I dont believe that will be correct. For example:

£300k fund is currently sitting tax free (income tax, capital gains tax and inheritance tax free). It has virtually identical investment options to other investment tax wrappers such as ISAs, bonds and unwrapped. If you were to drawdown an income of say £15000 a year then you would have to crystallise benefits on the pension. That means the pension fund is no longer inheritance tax free and the income forms part of your overall income and is taxable. If you reinvest that income into other investments you wont get as favourable tax treatment. ISAs may come close but they are not free of IHT. The pension wrapper is the most tax efficient.

However, there can be times that drawing down early can make sense. Maybe as a way to get as much capital out of your pension as you can before you die. However, that would really depend on what you are trying to achieve, what other assets and income you have and when you think you are going to die!

I_love_the_sun

As noted, my fund has lost £24,000 in a year.

If I had bought an annuity last year I would have taken 25% in cash, say £75,000, would have earned £3,500 in interest.

Would have also received c £14,000 in pension.

So £24,000 + £3,500 + £14,0000 = £41,500 + interest on the £14,000

I know that a year later (a year less to live) I would (hopefully) get a higher annuity rate, but with less cash to buy the annuity..........

In terms of other assetts, £70,000 in ISA's, bank accounts, shares.
Within the next 5 years a few endowments paying out c. £20,000
My wife is taking her pension later this year £12,000 lump sum and pension of
£4,000 pa
We have no debts, a house in the UK a house in Spain (will probably sell the Spanish house when we are in our 70's) and 25% share in a house some elderly relatives live in.
I have a small income of £4,000 pa from my hobby.

Regards

J

dunstonh

Ok, you last a small amount in the last 12 months. However, what about the growth in the 5 years previous? Close to doubled your money?

Investment returns zig zag and you take the rough with the smooth and average it out. Over the long term you expect the returns to be better than cash. If you look at one year in isolation then you make inaccurate assumptions.

If you are concerned about the risk of your investments (and a 7% loss is very little) then reduce the risk of your investments. You dont take it out of a totally tax free environment to bring it into a taxable environment just because we had a relatively poor year last year. If it worries you that much then put the pension into cash.

The pension hasnt lost you money. Where you invested has. The same areas that would have made you money in the previous years higher than cash. You can alter the investment spread to suit your needs.

sdooley

You could vest part only in an annuity - one quarter a year for four years say - that way you won't have the classic investment thing of selling just after a drop in prices, only to see them recover.

jamesd

I love the sun, a fairly small value drop, routine ups and downs scale. Maybe review the investments within it - might say what they are for feedback on them.

What are you using for living expenses at the moment? If you're living on money from the ISAs that may be a reason to start taking benefits from all or part of the pension, so that you keep the tax free income from the ISAs and take taxable pension income while you're not fully using the tax allowance you have. Then gradually shift money from the pension to the ISA wrapper.

Given the size of your pension pot and your likely lifetime it seems likely that you'd be better off financially by leaving the pension invested and using income drawdown instead of buying an annuity. Assuming that you're content to see variations like this one, and several times as large, happen over the years due to the normal stock market movements. You can limit the size of them with the investment choices you make but can't really comment on that at the moment because we have no idea of what the investments are.