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  1. #1

    pension 25% now or higher amount each year?

    Hi All, so have decided to draw from a smallish self employed pension fund of round figures value of 24000. comes with guaranteed annuity, would pay annual income of 2580, or 1940 p/a plus 25% tax free now (6k), a difference of 640 p/a, equivalent to about 9 1/2 years of the 'extra' pension income . (640x9.5) So, take the 25%, invest it and draw 640 each year to match the 'no tax free option', needing a return of 10% p/a so unlikely, or just accept the higher pension. Other monies are in place, so either option is valid . Any thoughts please, sorry if all that bit long winded ! Thank You

  2. #2
    Seems to me this is a lifestyle decision: assuming you don't have a short life expectancy, taking the higher pension and no lump sum seems the best bet to me, with no risk and good return. But if you want the lump sum for some reason and don't need the income, then that's the one to go for.

  3. #3
    A guaranteed annuity that had its guaranteed figures worked out a long time ago when annuity rates were much higher is likely to be a good deal whatever you decide.

    But a few points if you have a wife or partner:
    Does it die with you, or have a minimum number of years over which it would be paid (typically they have 5 or 10 year options)? A 5 year guarantee should cost little compared with a 0 years guarantee. A 10 year guarantee may also be attractively-priced.
    Does it offer a joint-life and survivor pension option? Again, if the guaranteed rates are attractive, this option is also likely to be attractive, if offered.

    If inflation stays low, the 100% pension could be a good deal; if inflation increases but the pension is a fixed-rate one, the 25% lump sum may make more if reinvested in something with income-growth potential, at the expense (naturally) of a lower starting yield.

  4. #4
    Are you a higher rate taxpayer currently ?

    If not, consider if you might be by taking the full pension.

  5. #5
    At retirement I had private pension pot of circa 130K. Financial adviser presented option of annuity or drawdown.

    I opted for annuity, enhanced because I am a smoker, joint life, yielding 7% a year.

    FA said taking the tax-free lump is a 'no brainer', bearing in mind how long it would take to recoup this amount through marginal increase in pension.

    We both agreed that 130K is too small an amount to consider drawdown, bearing in mind investment risk and on-going management fees for investment(s).

  6. #6
    I'd invest in a Corporate Bond fund and shove it into an ISA before / after 5th April. Not absolutely safe but should get a low-risk 4-5% tax free and the capital is still there to draw on if a higher-priority need (eg medical problem) arises later on.


 

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