Considering Lifetime Annuity Purchase. Am I Barmy?
Discussion
As per title, I'm considering purchasing a Lifetime Annuity (which is something I never thought I'd do), and I'd appreciate any (informal) feedback on my logic.
Basic situation is that I am 60 and currently have two Defined Contribution pensions. One from previous employment, which is effectively parked, and one that I am contributing to with current employer.
The parked one would provide a Lifetime Annuity of about £15K P/A (and, critically, should not trigger the MPAA). To my mind, this would allow me to do the following:
Increase my salary sacrifice contributions to my active pension by 15K P/A, as the resulting loss in net income from my salary would be made up for by the net income from the annuity.
This would leave me with:
• A total gross income of less than £50K (so no higher rate tax),
• Standard rate tax relief on about £18K of my salary sacrifice pension contribution
• Higher rate tax relief on about £42K of my salary sacrifice pension contribution
Effectively, I’d be using the annuity income to allow me to max out Pension tax relief while still providing a comfortable total net income. Obviously, there is a pretty good chance that any incoming Government will slash Pension Tax Relief, but I’d then either adjust Pension contributions accordingly and invest as much as I could into an ISA, or use the opportunity to cut my hours at work while still being able to invest a reasonable amount in my active pension.
The plan would then be to use the current “live” pension for flexible drawdown from 2028, along with the flat (but guaranteed) income from the annuity (and, eventually, the state pension).
My thinking is that there is a tax advantage to the above (somewhere!), and I’m pretty sure it is not seen as “double-dipping” in terms of pension tax relief.
Am I missing anything, or completely barmy to be considering it? With the current returns, it seems like a reasonable way of using a relatively small fund for the next four years (until planned retirement).
Basic situation is that I am 60 and currently have two Defined Contribution pensions. One from previous employment, which is effectively parked, and one that I am contributing to with current employer.
The parked one would provide a Lifetime Annuity of about £15K P/A (and, critically, should not trigger the MPAA). To my mind, this would allow me to do the following:
Increase my salary sacrifice contributions to my active pension by 15K P/A, as the resulting loss in net income from my salary would be made up for by the net income from the annuity.
This would leave me with:
• A total gross income of less than £50K (so no higher rate tax),
• Standard rate tax relief on about £18K of my salary sacrifice pension contribution
• Higher rate tax relief on about £42K of my salary sacrifice pension contribution
Effectively, I’d be using the annuity income to allow me to max out Pension tax relief while still providing a comfortable total net income. Obviously, there is a pretty good chance that any incoming Government will slash Pension Tax Relief, but I’d then either adjust Pension contributions accordingly and invest as much as I could into an ISA, or use the opportunity to cut my hours at work while still being able to invest a reasonable amount in my active pension.
The plan would then be to use the current “live” pension for flexible drawdown from 2028, along with the flat (but guaranteed) income from the annuity (and, eventually, the state pension).
My thinking is that there is a tax advantage to the above (somewhere!), and I’m pretty sure it is not seen as “double-dipping” in terms of pension tax relief.
Am I missing anything, or completely barmy to be considering it? With the current returns, it seems like a reasonable way of using a relatively small fund for the next four years (until planned retirement).
rpm1969 said:
Have you established that converting your DC pension to an annuity and drawing the income will not trigger a reduction in your pension annual allowance to £4k?
Yeah, as long as it is a lifetime annuity with no flexibility, it doesn't trigger the MPAA (I think limit is £10K now, even after MPAA is triggered). I'm not entirely sure why the regulations allow a lifetime annuity, but not any kind of flexible draw-down. Possibly because it's felt that flexible drawdown would be a very easy tool to maximise future contribution tax relief, whereas the lifetime annuity is more of a commitment. I'm surprised they allow either tbh.As far as I can see, it would be a good way to maximise the sum I get relief @ 40% which will only be taxed at 20% (Sadly, the chances of my pension cracking the 40% threshold are pretty slim) , and leave me with a mix of annuity and drawdown when I finally retire.
If I had reasonable certainty that the current 60K contributions limit would remain, I'd definitely go for it, but I don't reckon that enhanced level will survive long after the General Election.
There is a thread on this topic. Have a read of the opinions
https://www.pistonheads.com/gassing/topic.asp?h=0&...
https://www.pistonheads.com/gassing/topic.asp?h=0&...
leef44 said:
There is a thread on this topic. Have a read of the opinions
https://www.pistonheads.com/gassing/topic.asp?h=0&...
Perfect - thanks! Really just looking for some general opinions, so six pages should cover most of the bases.https://www.pistonheads.com/gassing/topic.asp?h=0&...
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