Adding to pension

Pobby · 16 May 2018 at 6:59PM

Hope this is not a daft question. I am retired and a taxpayer. We are selling our primary home and moving in with a close relative as tenants in common. There is no mortgage. This will mean that my wife and myself have money from the sale of our house.

At 69 I have no wish to be risky with the proceeds and was looking at buying a joint annuity. We both have pensions of just over £12,000 a year each.

Should I go down this route, might there be some tax advantage. As a working taxpayer, contributing to a pension, I had relief on the contribution. Does anything apply to a lump sum?

Thanks for reading.

Dox · 16 May 2018 at 7:05PM

There is a tax advantage in buying an annuity with your own money (as opposed to money coming direct from a pension fund). Part of the proceeds from such an annuity will be treated as a return of the capital invested (i.e. the amount you used to buy the annuity) and aren't taxable; the balance of the annuity is taxable at your marginal rate (in your case 20%).

Alternatively, you could contribute up to £2,880 and get tax relief (bringing the total to £3,600) a year each to a pension scheme even if you aren't earning. You could then draw the proceeds immediately with 25% of the 'pot' tax free and the rest taxable at your marginal rate (again, 20% for you and your wife). Buying an annuity using the proceeds of the pension 'pot' is an expensive way to go because admin costs will mean you don't get a great rate for a relatively modest sum.

Paul_Herring · 16 May 2018 at 8:49PM

Dox wrote: »

There is a tax advantage in buying an annuity with your own money (as opposed to money coming direct from a pension fund). Part of the proceeds from such an annuity will be treated as a return of the capital invested (i.e. the amount you used to buy the annuity) and aren't taxable; the balance of the annuity is taxable at your marginal rate (in your case 20%)..

"Purchased Life Annuity" is the term for these.

https://www.telegraph.co.uk/finance/personalfinance/2906389/The-annuity-that-thwarts-the-Revenue.html is 13 yrs old, but explains the concept a bit more.

A quick search shows there appears to be little difference between the amounts received for standard annuities and purchased life annuities - the main difference would be how much you'd get after income tax.

stoozie1 · 17 May 2018 at 12:03AM

Wben I asked about PLAs some of the knowledgeable posters suggested that as .uch as half the income might be tax free for that reason.

kidmugsy · 17 May 2018 at 12:21AM

Before you decide it's probably worth bearing in mind that you could each of you get interest of over £5k p.a. before you would be due to pay tax on it. At present interest rates this would require a huge amount of capital held in savings accounts but it's conceivable that for part of your retirement interest rates might be much higher. Still, holding all your capital as cash takes a great risk with inflation.

The trouble with annuities is that the sort that would probably be best - index-linked - are terribly expensive. You could buy level annuities, expecting your expenditure to decline as you age so that the effect of lowish inflation rates would be bearable. I don't know whether they are still on sale, but "with profits" annuities were available until a few years ago. They offered the prospect of growth if stock and bond markets did well, with a guaranteed minimum payment even if they did badly. I don't know whether they could fit in to the tax regime for PLAs.

HOLD ON, I've missed something. You are presumably both receiving old-style State Retirement Pensions? Why not each of you suspend your pension for (say) six years - the official verb is "defer" - and then take your reward as a pension that will be 62.4% bigger? Would that be a help to your budget - an equivalent to an inflation-linked annuity at a good price?

Meantime you'd live partly off your capital, or a mixture of capital and PLA. Moreover, in contrast to the case for new-style state pensions, much of the extra pension is inheritable by your spouse when you die. If you are going to use an IFA I suggest you insist he compare this strategy with the strategy of using all the capital to buy a PLA.

Further thought: let's pretend, to be concrete, that each of you gets £7k p.a. SRP and £5k p.a. occupational pension. You defer your SRP. Each year you contribute £2,880 to a SIPP and extract £3,600 from it. (Details to be adjusted to keep the provider's charges low.) Now you've used £8,600 of your Personal Allowance. You still have £3,000 p.a. left. You buy a PLA of £6k p.a. of which (following stoozie) we'll assume half is taxable and half isn't. So now your income is effectively £5k occupational, plus £720 profit from the SIPP, plus £6k from the PLA = about £12k, and with no income tax to pay. So you've managed to defer your SRP without depressing your income: meantime your SRP is growing like billy-oh. You back up that income with interest on savings and perhaps spending a little capital. At age 75 you have to stop using the SIPP stunt. That's when you restart your SRPs.

This strategy may have merits. Personally I think I might not bother with the PLA and might incline to take suitable income from savings and investments until I was 75. At 75 I might well conclude that managing savings and investments was becoming a bit too much and then buy an LPA. That inclination, though, is personal. Yours might perfectly reasonably differ.

GunJack · 17 May 2018 at 7:52AM

Just a thought, are there any inheritances to be considered when you and your wife both die?

Pobby · 17 May 2018 at 10:57AM

Thank you all very much for your posts. Firstly we are already taking our state pensions. With serps they are both approx. £8000 per annum. a further mix of private and company pensions take it to about ££12,000 per annum each.

After the sale of the house, there will be about, £180000 in total savings. Currently, the pensions are enough to live perfectly well. I retired at 61 due to ill health and in 8 years we have only used our savings to buy out my ex-brother in law, building repairs to the house, one large car repair bill and £1,000 to help me create a music studio:}.

So in 8 years, little has been touched.

Leaving an inheritance. We do not have kids but plenty of nephews and nieces. The joint property is a large detached 3 bed home in the south-east so when sold there should be a decent bit to distribute.

To date, I have looked at peer to peer, high yielding shares and crowdfunding on property. My risk level is low.

LHW99 · 17 May 2018 at 11:32AM

To date, I have looked at peer to peer, high yielding shares and crowdfunding on property.

My risk level is low.

Not sure those two statements sit together very well.
IMO for low risk you should look at funds, and possibly aim for global trackers with a bond component.
Individual shares particularly are generally regarded as higher risk.

Linton · 17 May 2018 at 12:00PM

Pobby wrote: »

Thank you all very much for your posts. Firstly we are already taking our state pensions. With serps they are both approx. £8000 per annum. a further mix of private and company pensions take it to about ££12,000 per annum each.

After the sale of the house, there will be about, £180000 in total savings. Currently, the pensions are enough to live perfectly well. I retired at 61 due to ill health and in 8 years we have only used our savings to buy out my ex-brother in law, building repairs to the house, one large car repair bill and £1,000 to help me create a music studio:}.

So in 8 years, little has been touched.

Leaving an inheritance. We do not have kids but plenty of nephews and nieces. The joint property is a large detached 3 bed home in the south-east so when sold there should be a decent bit to distribute.

To date, I have looked at peer to peer, high yielding shares and crowdfunding on property. My risk level is low.

You can still defer your SPs even though you have started taking them. For someone reaching SP age before April 2016 this is an extremely good deal with a much better inflation linked return than you can get on cash or by buying an annuity, which is what your first post suggested you may do.

Why were you thinking of buying an annuity since you say you dont need more income?

Adding to pension

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