Annuity Question

[30-6]

I have been reading recommended government sites and phoned various recommended organizations regarding pensions for about 6 months, and I still don't understand it all. Everyone you talk to for advice seems to have a different view. I'm a little bit more educated on the subject, but can someone answer this for me.

My STATE PENSION starts next year when I'm 66.

My WORKS PENSION became available in March when I hit 65, this is the one the question is about.

So, It's a "Defined Benefit with Guaranteed Minimum Pension" and has a "Non-Reserved Fund and Reserved Fund".

I don't want to go down "Flexi Access Drawdown" route so am choosing "Annuity". Just have to think out the various options on offer.

But this is the bit I want to clarify.

Q1 - I can get 25% tax free. What part of the pot does this come from, is it total of Non-Reserved + Reserved, then the leftovers pays my pension and annuity ?

Q2 - The "Reserved Fund" pays my pension

Q3 - The "Non-Reserved Fund" pays my annuity

Q4 - So, I get the 25% tax free AND a monthly pension AND a monthly annuity payment. Is this correct ?

Thanks in advance my head is cooked.

[Keith RW]

Take some proper financial advice from a proper FSA approved financial advisor, this will be one of, if not the most important decision, you will be making that will define your income for the rest of your life.

As a working guy on the tools for most of my career I never thought I would need a financial advisor as I have always looked after my own finances all of my working life but 10 years ago I took advice from a good friend and got in touch with one, 10 years later my plans have come together, I retired last year 3 years earlier than when my state pension will kick in when I hit 66.

I'm not saying this was all down to the services of a financial advisor but it certainly helped, and still helps, and it saves me/makes me more than the costs of his fees.

Every now and then we need pointing in the right direction and none more so such as now when it comes to this stage in life with regards to pensions and deciding which is the right choice to make,  this can be a nightmare with constantly changing markets and requires serious consideration.

I believe you can get advice on a one off basis if not wanting to retain the services of an advisor long term.

I steered away from indemnities as once the decision is made there is no turning back, that said I understand they are making a comeback due to current market but at the end of the day I listen to a guy who I pay to advise and then make the decision, he knows about money whereas I know about nuts and bolts (or used to).

Spend a few quid, get some advice, get the facts, when armed with the options you can then make an informed decision.

Hope that helps as my head was a shed regards pensions for years.

[benbobailey]

47 minutes ago, 30-6 said:

I have been reading recommended government sites and phoned various recommended organizations regarding pensions for about 6 months, and I still don't understand it all. Everyone you talk to for advice seems to have a different view. I'm a little bit more educated on the subject, but can someone answer this for me.

My STATE PENSION starts next year when I'm 66.

My WORKS PENSION became available in March when I hit 65, this is the one the question is about.

So, It's a "Defined Benefit with Guaranteed Minimum Pension" and has a "Non-Reserved Fund and Reserved Fund".

I don't want to go down "Flexi Access Drawdown" route so am choosing "Annuity". Just have to think out the various options on offer.

But this is the bit I want to clarify.

Q1 - I can get 25% tax free. What part of the pot does this come from, is it total of Non-Reserved + Reserved, then the leftovers pays my pension and annuity ?

Q2 - The "Reserved Fund" pays my pension

Q3 - The "Non-Reserved Fund" pays my annuity

Q4 - So, I get the 25% tax free AND a monthly pension AND a monthly annuity payment. Is this correct ?

Thanks in advance my head is cooked.

If this is truly a defined benefit pension, the rules will be set by scheme. Normally you can receive a tax free sum ( the amount is subject to scheme rules) and an annual pension ( may include spouse benefit on death). You should be given a clear explanation and choice of options from scheme administration, with your forecast. Regards 

[JohnfromUK]

I am in a very similar position to you - but a year ahead.  I will share what I am doing/did on the basis it may help you, but as others have said above - take proper advice from a professional.  Everyone's circumstances are different - expectations in retirement, health, tax, family, financial assets, liabilities and dependencies - just to name a few.

I am just 66 - and my state pension begins at 66 - and I'm expecting the first payment imminently (I have completed the application and  been given the date and expected amount etc.).

I had two 'defined benefit' legacy pensions from around 30 - 40 years ago both of which have a Guaranteed Minimum Pension element (GMP) and one of which has an additional 'bonus' element.  I think this would be similar to yours, but different terminology.  These started on my 65th birthday (a year ago now) and it is these I will mainly discuss, but do bear in mind this is my circumstances and my particular policies.  Yours will be different. 

Note that for most (all?) people these are a result of being 'contracted out' of the State Earnings Related Pension Scheme (SERPS) for some years.  My employer then operated these schemes and many people working around the 1980/90s will have had these.  As part of the deal the scheme did with the Govt - they had to provide a GMP element and could also provide an additional element (called bonus in my case).  There were other elements such as a 'widows' pension tied in.  Often they are not inflation/index linked because they were only supposed to be a supplementary to the state pension replacing the 'earnings related' part and leaving the 'basic' part of the state scheme.

My two both contacted me with offers/choices around 2 or 3 months before my 65th birthday which included either just a 'pension' (i.e. a sum paid monthly for life) paid for by the fund, or a percentage of the fund as cash and a smaller pension paid monthly.  Both also included a 50% 'widows' pension paid to my spouse on my death.  In my case, the main choice was whether to take all as monthly pension income or take part cash now and a lower pension income.  Note that the scheme rules for me still had the full GMP - but if you took the cash element (I think mine was 25% as well) the GMP was also reduced.

I also had the option to take all the 'transfer value' of the cash to another provider to get a better offer BUT this had to meet the GMP commitment.  This is important and is a rule of the schemes.  Typically - because the legacy defined benefits have to be met from the fund - no other provider will be able to match as current annuity rates are lower than in the past - but it is worth checking.

Now because the schemes and figures of GMP were defined a long time ago, it is really important to go through the figures carefully.  The actual fund value is used to buy an annuity that pays the pension which MUST include the GMP value.  If you take 25% as cash, the fund used for the annuity (and so GMP) is also lower.  An absolutely key point here is what percentage of the fund value is paid as an annual pension - these old schemes can often be very good value here.  In my case it was a real 'no brainer' to take 100% income (no cash) because the annuity rate that was required was much better than can currently be obtained.  Do look at that carefully.

You need to go through the details of your particular scheme with a qualified advisor and listen to what they say.  I cannot directly answer your questions as they will be in the details of your scheme - and the best choices for you will be specific to your circumstances.

In my case simply taking the offered full 100% pension on both my schemes was the best value.  The annuity rate guaranteed by the rules of my scheme (i.e taking  the full fund value to give a monthly pension) was very easily the best deal.  I had three separate advisors - my employer provided a free IFA as part of an early retirement deal, I use separately an advisor for another private scheme I had, and I have a relative who has worked at senior level in the financial sector - and all were agreed on that point.

P.M will also be sent.

[Townie]

14 hours ago, Keith RW said:

Take some proper financial advice from a proper FSA approved financial advisor, this will be one of, if not the most important decision, you will be making that will define your income for the rest of your life.

As a working guy on the tools for most of my career I never thought I would need a financial advisor as I have always looked after my own finances all of my working life but 10 years ago I took advice from a good friend and got in touch with one, 10 years later my plans have come together, I retired last year 3 years earlier than when my state pension will kick in when I hit 66.

I'm not saying this was all down to the services of a financial advisor but it certainly helped, and still helps, and it saves me/makes me more than the costs of his fees.

Every now and then we need pointing in the right direction and none more so such as now when it comes to this stage in life with regards to pensions and deciding which is the right choice to make,  this can be a nightmare with constantly changing markets and requires serious consideration.

I believe you can get advice on a one off basis if not wanting to retain the services of an advisor long term.

I steered away from indemnities as once the decision is made there is no turning back, that said I understand they are making a comeback due to current market but at the end of the day I listen to a guy who I pay to advise and then make the decision, he knows about money whereas I know about nuts and bolts (or used to).

Spend a few quid, get some advice, get the facts, when armed with the options you can then make an informed decision.

Hope that helps as my head was a shed regards pensions for years.

Completely this. Made redundant at 59 and the advice has been invaluable. 

[Cosmicblue]

Pensions are very difficult to grasp, new terminology serious implications if you get it wrong - need to find a decent, properly qualified independent financial adviser for guidance.

Finding a genuine one is harder than you'd think - I'm 65 and state pension kicks in @ 66 in August - got made redundant in Feb of this year and paid off.   I've had 19 jobs since I left school in 1973 with bits of pension all over the place.   The first 2 advisers managed I talked to said no more than 'you should be OK', the third (who came by recommendation from a former colleague)  asked for data and then two weeks later set up an on-line meeting and were able to show how all the pensions including state would work in practice - this was free.   I had proper comfort that I was making a sound decision - way beyond 'should be OK'.   Obviously going forward they'd like to manage the pension funds consolidated into something more modern and I'm cool with that: https://blueskyifas.co.uk/

[oowee]

I run my wifes private pension which will allow her to retire at very early and like to think I have a pretty good handle on choices and where we are at. I still took advice (second opinion) to look at what we are doing to make sure the arrangements we had made were sound. 

There are so many options and choices to make that will depend on your circumstances. As others have said take advice and take your time. No harm it looking at a couple of companies either. Most will give a first meeting free. 

[London Best]

The last time I consulted a financial advisor (free through a building society) he asked to see my portfolio. He spent ten minutes studying it, then pushed it back across his desk to me and said, “what are you talking to me for?”

I figured I was doing something right.

[Dave at kelton]

10 hours ago, Townie said:

Completely this. Made redundant at 59 and the advice has been invaluable. 

This…there are so many factors to be taken into account and then pieced together it is imperative you get it right!

[Old Boggy]

Bit late coming to this and I don`t think that it`s been mentioned before.

When arranging an annuity combining a couple of private pensions, my financial adviser asked if either myself or my wife (wife is due half of my private pension on my demise) had any illnesses or were taking any medication.

At the time (ten or so years ago) I replied that I had no illness whatsoever but my cholesterol was marginal but I wasn`t on any medication. " Go to your doctor and get prescribed statins" he said.

When it came to my wife, I explained that she was on several tablets for acute angina (there`s a joke there somewhere), ulcers, etc etc. " Oh good" he said. " lets get them listed down with the medication that she`s on"

When I asked why, he explained that any illness could be regarded as shortening your or your wife`s lifespan, therefore the amount of payable pension increases accordingly.

Something that I would never have thought of or had explained to me previously.

OB

[Mungler]

If you have a strong genetic line (lots of relatives living to big numbers) and have lead a clean and active life, then an annuity probably makes sense but it’s a roll of the dice as you could still get hit by a bus the next week.

For years everyone has said annuities are rubbish - has the pendulum now swung back and if so why?

We all takes notes and measure against what other people are doing - I’d love to know what the average pension pot / plan looks like and what people think they need per annum to live off in their pension years. All I know is that my predicted annual state pension in 15 years time might buy a full tank of petrol for a medium sized family car 😆

[JohnfromUK]

1 hour ago, Mungler said:

what people think they need per annum to live off in their pension years

This crops up regularly in various newspaper articles based on thing like;

https://www.theguardian.com/money/2023/apr/15/uk-pensions-how-much-retire-cost-of-living-inflation-income

[Mungler]

4 hours ago, JohnfromUK said:

This crops up regularly in various newspaper articles based on thing like;

https://www.theguardian.com/money/2023/apr/15/uk-pensions-how-much-retire-cost-of-living-inflation-income

Cheers for that. 

 

[TIGHTCHOKE]

6 hours ago, Mungler said:

 All I know is that my predicted annual state pension in 15 years time might buy a full tank of petrol for a medium sized family car 😆

By the time you qualify, you'll be 85 or 90 if it hasn't been abolished by then!

As I approach retirement, every time I get close to it the Government move it out of reach again.

[JohnfromUK]

Just now, TIGHTCHOKE said:

As I approach retirement, every time I get close to it the Government move it out of reach again.

I'm officially there (66) as of about 3 weeks ago.  Got the bus pass to prove it .......... but there are no buses here.

[London Best]

2 hours ago, TIGHTCHOKE said:

 

As I approach retirement, every time I get close to it the Government move it out of reach again.

Just so long as you don’t start wishing you had spent less money on shooting!

 

2 hours ago, JohnfromUK said:

Got the bus pass to prove it .......... but there are no buses here.

I would rather walk than go on a flaming bus! 
Most obnoxious form of transport known to man.
Not been on one for more than half a century.

[JohnfromUK]

1 hour ago, London Best said:

I would rather walk than go on a flaming bus!

Me too, but it is a (free) useful ID now so many places demand ID.  Also quite a few places do OAP rates on showing bus pass.

[London Best]

10 hours ago, JohnfromUK said:

Me too, but it is a (free) useful ID now so many places demand ID.  Also quite a few places do OAP rates on showing bus pass.

To me it is worth every penny not to travel like cattle with the public.

[30-6]

Buses are great as long as you haven't got a cougher behind you.

[30-6]

Update on my op. 

Firstly thanks for all the input to me much appreciated.

I had a financial advisor come to me, literally lives around the corner. Although I asked for annuity help, she explained that for her to be thorough she would look at all options, Flexi drawdown etc., First appointment free, if I take her advice that is when payment kicks in.