Alternatives to Annuities

scaredofdebt · 23 October 2016 at 11:30AM

Hi,

I aim to retire in a couple of years at age 55, when I can get my hands on my company pension lump-sum, assuming the government don't change the rules, bless 'em!

I should have around £200k after tax. I intend to carry on working part-time as I also have a freelance role that gets me around £500 a month for a few hours per week.

I want to maximise the return on the pension funds, annuities give a pitiful ~2% (risk free I know), I think I can do better and will accept some risk.

My current thoughts are:

1. Buy to Let, I know the risks as my parents do this and in the area I live I would expect to get around 10%.

2. Property renovation. I am no expert in this field but reasonably fit and competent.

3. Franchise, I would want something I can do either part-time or on a fairly hands-off basis, ie employ a manager to run it.

4. Shares, for dividend income, not easy to pick the best ones though!

5. Peer to peer lending, I am testing this at the moment and getting 8% net, so not bad.

6. Buying websites for an income from affiliate etc marketing.

7. Run a guest-house/B&B

Anything else?

Thanks for any ideas.

AnotherJoe · 23 October 2016 at 11:52AM

Are you saying you intend to take your entire pension as a lump sum in one go? Or did you just mean the lump sum component of the pension, in which case there wont be any tax?

scaredofdebt · 23 October 2016 at 11:59AM

The £200k is the entire pension pot after tax, this isn't 100% guaranteed due to the stock market etc but it's a ball-park figure.

AnotherJoe · 23 October 2016 at 12:20PM

Then you would be utterly, completely, ludicrously barking mad to take it all in one go.

Because your options 1-7 are all about making money, yet option zero, what you start with, involves you losing needlessly maybe £50,000-£100,000. Making a mockery of you then attempting to earn money with the remainder.

Start with the basics, you should be looking at drawing down around £53k a year and only therefore paying tax on 20% (£53k because 1/4 is tax free, which then leaves about £43k on which to pay 20% tax )and not get into the 40% and above rates.

Are you currently a higher rate taxpayer?

scaredofdebt · 23 October 2016 at 1:13PM

No, not a higher rate tax payer.

dunstonh · 23 October 2016 at 1:15PM

My current thoughts are:

1. Buy to Let, I know the risks as my parents do this and in the area I live I would expect to get around 10%.

2. Property renovation. I am no expert in this field but reasonably fit and competent.

3. Franchise, I would want something I can do either part-time or on a fairly hands-off basis, ie employ a manager to run it.

4. Shares, for dividend income, not easy to pick the best ones though!

5. Peer to peer lending, I am testing this at the moment and getting 8% net, so not bad.

6. Buying websites for an income from affiliate etc marketing.

7. Run a guest-house/B&B

Anything else?

Missed the most obvious one. Income drawdown. Given the ludicrus amount of tax you would pay for options 1-7, you would be throwing far too much money away for any of those and income drawdown would be the winner by far.

Your pot of £200k after tax sounds like it would be in the region of £350k before tax. Do you really want to kiss goodbye to all that money in tax? It is very generous of you and on behalf of other taxpayers, I thank you. However, you really need to be more sensible with your planning. All those options you mention would have to recover around £115k tax before they start to show any profit over drawdown. Drawdown won't avoid tax but with your fund, you can avoid the 40% and 45% bands and wont get your personal allowance removed (which you would with what you are proposing with 1-7). Phased flexi-access drawdown may avoid tax or at least keep it to a very small amount.

You havent said what your target income is.

jamesd · 23 October 2016 at 1:20PM

So, you take the whole pot in one go. 25% is a tax free lump sum. The rest is taxable as income in the tax year(s) in which it is taken. You lose your personal allowance because your income is now far above the £100,000 threshold for starting that and you pay 45% on more than half of the money and 40% on most of the rest. Your choice just cost you something like 50% of the value of the taxable 75% up front. No uncertainty, guaranteed, it's the law.

How does that guaranteed 50% loss of capital look to you as an investment decision?

Say you instead take the 25% tax free lump sum from the lot and take the 75% in chunks of £100k a tax year. Now your highest income tax rate is 40% and you don't lose your personal allowance.

Say you combine that with buying circa £100k of one of more VCTs that garner you 30% tax relief initially and pay 10% a year tax exempt on the net purchase price of £70k with a minimum holding time of five years. The VCT buy eliminates much of the income tax cost, you get 30k up front and 7k x 5 = 35k of tax exempt income and in five years you take out the 70k. Of the taxable 100k you get back circa 135k after tax.Very crude approximations used here to illustrate it.

You repeat that each year until the money is all out of the pension. Or you adjust the amounts to do it in five years so that in the sixth you're starting to sell the VCTs, if you don't like the ongoing tax exempt income.

Or you do it more slowly still as AnotherJoe suggested and optionally use smaller VCT buys and still have most of the up front 25% tax free lump sum to invest.

Or you combine it with a mortgage or equity release to get you the capital then repay out of the ongoing withdrawing from the pension.

Not buying an annuity is a good move but your initial plan throws away a lot of money in a guaranteed tax loss that you can avoid with better planning.

Thrugelmir · 23 October 2016 at 3:34PM

What makes you think that the alternatives you've listed will produce a decent income for the next 30 years or so? Lost capital is hard to replace once one finishes full time employment. Higher returns are high for good reason. The risk, of which there any are many kinds. To assume there's no risk is naive.

scaredofdebt · 23 October 2016 at 3:59PM

Thanks everyone, as I say, several years til I retire so I am merely doing some forward planning.

I don't really have a target income, I would need around £12k net per annum to "survive" but obviously I'd like to enjoy retirement so more is better!

scaredofdebt · 23 October 2016 at 4:02PM

Thrugelmir wrote: »

What makes you think that the alternatives you've listed will produce a decent income for the next 30 years or so? Lost capital is hard to replace once one finishes full time employment. Higher returns are high for good reason. The risk, of which there any are many kinds. To assume there's no risk is naive.

I certainly can't guarantee any of those would produce a decent income for 30 years, but I can't guarantee I will live for 30 years so another reason I don't like annuities.

I am doing some testing where possible, I have some peer to peer funds, have some shares, websites producing income etc but only a few thousand invested.

I am not risk averse but I am not about to withdraw the lot and put it on black!

Thanks for the comments though, it is appreciated.

:beer:

scaredofdebt · 23 October 2016 at 4:04PM

jamesd wrote: »

Say you instead take the 25% tax free lump sum from the lot and take the 75% in chunks of £100k a tax year. Now your highest income tax rate is 40% and you don't lose your personal allowance.

Say you combine that with buying circa £100k of one of more VCTs that garner you 30% tax relief initially and pay 10% a year tax exempt on the net purchase price of £70k with a minimum holding time of five years. The VCT buy eliminates much of the income tax cost, you get 30k up front and 7k x 5 = 35k of tax exempt income and in five years you take out the 70k. Of the taxable 100k you get back circa 135k after tax.Very crude approximations used here to illustrate it.

You repeat that each year until the money is all out of the pension. Or you adjust the amounts to do it in five years so that in the sixth you're starting to sell the VCTs, if you don't like the ongoing tax exempt income.

Or you do it more slowly still as AnotherJoe suggested and optionally use smaller VCT buys and still have most of the up front 25% tax free lump sum to invest.

Thanks, this is interesting and I will give it some more thought, if I can reduce the tax then obviously that is good.

:beer:

Alternatives to Annuities

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