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Small pension 10K - Annuity, move it or leave it?

Including Financial Independence and Retiring Early (FIRE)
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Small pension 10K - Annuity, move it or leave it?

#408369

Postby Reactive » April 30th, 2021, 5:16 pm

Hi all,

I have a relative has been sent a letter informing them of the options they have as they approach retirement age, from a small pension they got from a part-time job which is currently worth about 10K.

It's important to say that they don't "need" the money at this moment in time just now and would be happy just to leave it. At the same time, they wonder if it would be worth taking advantage of the 25% tax free option and use it to invest in an annuity which at roughly (2.5K wouldn't be a lot). Other options are to move it - e.g. Vanguard? (too expensive, not worth the hassle for a small amount?) or to just keep things simple and leave it where it is for now.

Thanks in advance for fellow members thoughts.

PS.
Just to also be clear, I will not be advising them what to do and will simply pass on the views expressed by members.

Alaric
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Re: Small pension 10K - Annuity, move it or leave it?

#408394

Postby Alaric » April 30th, 2021, 7:26 pm

Reactive wrote:At the same time, they wonder if it would be worth taking advantage of the 25% tax free option and use it to invest in an annuity which at roughly (2.5K wouldn't be a lot).


Presumably there's an option where they use 100% of the fund to buy an annuity. It should also be possible to to transfer the whole lot into a SIPP and treat it as "rainy day" assets to be called on when needed. Once in a SIPP, they could invest it in Vanguard funds or whatever. There are SIPP running costs though.

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Re: Small pension 10K - Annuity, move it or leave it?

#408397

Postby Mike4 » April 30th, 2021, 7:38 pm

Reactive wrote:At the same time, they wonder if it would be worth taking advantage of the 25% tax free option and use it to invest in an annuity


Is the income from the annuity not taxable at their marginal rate?

If it is, then wouldn't bunging into an ISA make more sense from a taxation POV?

Asking because I genuinely don't know the answers to these questions, and have a similar situation myself, approaching!

xeny
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Re: Small pension 10K - Annuity, move it or leave it?

#408502

Postby xeny » May 1st, 2021, 8:59 am

Mike4 wrote:
Reactive wrote:At the same time, they wonder if it would be worth taking advantage of the 25% tax free option and use it to invest in an annuity


Is the income from the annuity not taxable at their marginal rate?

If it is, then wouldn't bunging into an ISA make more sense from a taxation POV?


Income from an annuity is taxable, but remember an ISA and an annuity are very different things risk wise - an ISA is just a wrapper, and whatever returns you see depend on what you put in it, an annuity is a guaranteed, albeit at present very small return. I'd be reluctant to buy an annuity with a tax free lump sum as you're essentially increasing your potential tax liability.

To the OP, to my mind that is too small an amount to buy an annuity with - it's impossible to answer the question without more information about their other assets - can it be moved into an existing SIPP, I'd have thought Vanguard's pension offer is at least worth investigating as I think it is relatively cheap....

If they don't need it, leaving it invested means it is hopefully going to grow, so ultimate return is potentially greater, and if they're determined to buy an annuity, the older you are the you buy, the better rate you get.....

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Re: Small pension 10K - Annuity, move it or leave it?

#408530

Postby Mike4 » May 1st, 2021, 10:49 am

xeny wrote:
Income from an annuity is taxable, but remember an ISA and an annuity are very different things risk wise - an ISA is just a wrapper, and whatever returns you see depend on what you put in it, an annuity is a guaranteed, albeit at present very small return. I'd be reluctant to buy an annuity with a tax free lump sum as you're essentially increasing your potential tax liability.

To the OP, to my mind that is too small an amount to buy an annuity with - it's impossible to answer the question without more information about their other assets - can it be moved into an existing SIPP, I'd have thought Vanguard's pension offer is at least worth investigating as I think it is relatively cheap....

If they don't need it, leaving it invested means it is hopefully going to grow, so ultimate return is potentially greater, and if they're determined to buy an annuity, the older you are the you buy, the better rate you get.....


Thanks for your answer, much appreciated.

Leaving it invested must on reflection, be almost analogous to bunging it into an ISA, given both are tax-free wrappers for the underlying investments. So for then OP, maybe the decision depends to an extent on the charges being applied on the pension plan compared to an ISA, the transfer costs, the performance of the underlying investment and the degree of control over what the cash is invested in, compared to the ISA options. And obviously, whether their ISA allowances lie unused, are fully utilised or something in between.

Edit to add:
Oh and another thing. Moving the whole lot to an ISA will trigger a tax bill in the first place, on the 75% that is not tax free, won't it? Sop unless the pension is performing poorly, might well be worth leaving it alone.

xeny
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Re: Small pension 10K - Annuity, move it or leave it?

#408566

Postby xeny » May 1st, 2021, 1:10 pm

Mike4 wrote:Oh and another thing. Moving the whole lot to an ISA will trigger a tax bill in the first place, on the 75% that is not tax free, won't it? Sop unless the pension is performing poorly, might well be worth leaving it alone.


ISA and DC pension are both wrappers - generally you avoid unwrapping either unnecessarily.

If you want to change what's in the wrapper, change what's in the wrapper, don't unwrap the pension (generating as you say a tax bill) to put it in an ISA just because you're unhappy with what the investment in the pension happens to be.

Worst case if it's an employer managed pension you may need to move to a SIPP.

That said, depending on the OP's circumstances, it's worth being aware of https://www.pensionsadvisoryservice.org ... h-lump-sum

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Re: Small pension 10K - Annuity, move it or leave it?

#408568

Postby kempiejon » May 1st, 2021, 1:19 pm

Mike4 wrote:Edit to add:
Oh and another thing. Moving the whole lot to an ISA will trigger a tax bill in the first place, on the 75% that is not tax free, won't it? Sop unless the pension is performing poorly, might well be worth leaving it alone.


Another positive for doing nothing is that leaving it in the pension should remove it from any inheritance taxes and defined contribution pensions can be passed on.

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Re: Small pension 10K - Annuity, move it or leave it?

#408602

Postby mc2fool » May 1st, 2021, 3:45 pm

Reactive wrote:Other options are to move it - e.g. Vanguard? (too expensive, not worth the hassle for a small amount?

You don't say if this is a defined benefit or defined contribution pension, but in either case, as it's less than £30,000, there's no mandatory independent financial advice needed to transfer it. So, unless the scheme is going to charge exit fees, it shouldn't be at all expensive to transfer it out to a SIPP; quite likely even free.

Once it's out in the SIPP, Vanguard charge 0.15%pa on the value of the SIPP for the account fee, so for £10K that's £15, so not expensive. AJ Bell charge 0.25% so £25pa.

All that said though, it's worth pointing your relative at https://www.pensionwise.gov.uk/en/transfer-pension and them finding out the answers to the questions posed therein.

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Re: Small pension 10K - Annuity, move it or leave it?

#408613

Postby ursaminortaur » May 1st, 2021, 5:03 pm

Mike4 wrote:Edit to add:
Oh and another thing. Moving the whole lot to an ISA will trigger a tax bill in the first place, on the 75% that is not tax free, won't it? Sop unless the pension is performing poorly, might well be worth leaving it alone.


Though of course, depending on the OP's circumstances, the taxed 75% might full within their personal allowance meaning their was no actual tax to pay. Another thing though to bear in mind, again depending on the OP's circumstances, is that once you have taken potentially taxable income from a drawdown pension the MPAA kicks in meaning that any future contributions to a DC pension are restricted to £4000 per year. The MPAA though doesn't apply to payments from a DB pension or annuity.

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Re: Small pension 10K - Annuity, move it or leave it?

#408615

Postby scrumpyjack » May 1st, 2021, 5:22 pm

There are perhaps two other factors to take into account, (assuming this is a DB pension and nor DC).

The current very low interest rates mean that at present the capital sum that an index linked pension entitlement is valued at is large. That may not always be the case.

The current capital value is below the level at which you are forced to take financial advice (expensive and hard to get) if you want to realise the pension capital value. Worth monitoring the capital value as if it gets to 30k, you will run into problems if you want to realise it.

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Re: Small pension 10K - Annuity, move it or leave it?

#408695

Postby Wuffle » May 2nd, 2021, 8:33 am

Assuming quite a bit, the amounts involved tempt me towards this bit of mental justification.
Call it housekeeping.

Take the 25%, ISA it, holiday, whatever.
Pull the remaining 7,500 when you are 67 and push back the state pension for a year.
Cash flow roughly nets out, the tax allowance kind of nets out, the 10k kind of moves from private to index linked state and tidies everything up.

W.

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Re: Small pension 10K - Annuity, move it or leave it?

#408704

Postby Wuffle » May 2nd, 2021, 9:21 am

I was very casual with my language in the previous post.
Separating out the 25% is a bit of a red herring and of no consequence to the thrust of the plan.
For additional clarity, you end up having effectively purchased an annuity from the govt. as the state pension when you do claim will be uplifted by 5.8%% for pushing back by a year, say about a tenner a week.
Ultimately it ends up one less entity to faff about with on a bank statement and for whoever tidies things up right at the end.

W.

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Re: Small pension 10K - Annuity, move it or leave it?

#408720

Postby staffordian » May 2nd, 2021, 10:58 am

Wuffle wrote:I was very casual with my language in the previous post.
Separating out the 25% is a bit of a red herring and of no consequence to the thrust of the plan.
For additional clarity, you end up having effectively purchased an annuity from the govt. as the state pension when you do claim will be uplifted by 5.8%% for pushing back by a year, say about a tenner a week.
Ultimately it ends up one less entity to faff about with on a bank statement and for whoever tidies things up right at the end.

W.

A possible word of caution. I'm sure I have read that deferring a state pension is now far less advantageous than it used to be. Possibly depending on when state pension age was or is reached?

Edit: Just checked. Sorry, that 5.8% is the current rate. It used to be about twice that before 2016

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Re: Small pension 10K - Annuity, move it or leave it?

#408766

Postby Corvid » May 2nd, 2021, 2:01 pm

My wife has a DC fund of about the same value with an estimated pension of about £220 PA. We have been thinking about what to do with it.

Ideally she would transfer it into her LGPS AVC fund but we're not sure if this is possible.

She intends to retire in 5 years at 60 so we are also investigating whether when she retires she can defer her 2 DB pensions for a year and take 100% of this DC fund tax free as it would be her only taxable income that year.

She doesn't have a SIPP so transferring it to a SIPP would not be ideal as then it would be subject to charges.

Anyone have any opinions on these strategies?

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Re: Small pension 10K - Annuity, move it or leave it?

#409611

Postby Reactive » May 5th, 2021, 4:45 pm

mc2fool wrote:
Reactive wrote:Other options are to move it - e.g. Vanguard? (too expensive, not worth the hassle for a small amount?

You don't say if this is a defined benefit or defined contribution pension, but in either case, as it's less than £30,000, there's no mandatory independent financial advice needed to transfer it. So, unless the scheme is going to charge exit fees, it shouldn't be at all expensive to transfer it out to a SIPP; quite likely even free.

Once it's out in the SIPP, Vanguard charge 0.15%pa on the value of the SIPP for the account fee, so for £10K that's £15, so not expensive. AJ Bell charge 0.25% so £25pa.

All that said though, it's worth pointing your relative at https://www.pensionwise.gov.uk/en/transfer-pension and them finding out the answers to the questions posed therein.

It is a Group personal pensions, I believe it's defined contribution pension. I'll pass on this information to them.

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Re: Small pension 10K - Annuity, move it or leave it?

#409614

Postby Reactive » May 5th, 2021, 4:47 pm

Thank you all for your replies. Certainly some food for thought for my relative.


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