In the GB News Pensions and Retirement Q&A, Jasmine Birtles answers questions from GB News members. You can email your question to money@gbnews.uk.
Question: I am just wondering if you can help me. I will be 75 next April and my only income is my state pension which is quite high at £28500pa. My pension pot is £70000 from which I have already taken the 25 per cent a few years ago. I can now buy a yearly annuity of £5100 pa if I include my husband who is 65 next April for him to receive a 50 per cent annuity of £2500pa after my death.
“I could take a higher annuity of £5400 if I do not put his name on it. My query is that I would need to live at least 14 years to get back my £70000 pension pot which will obviously be taxed at 20 per cent. Due to my age would you recommend that I forego the annuity route and take drawdown instead?
“If I was able to drawdown £15000-£20000 each year which would be added to my state pension I wouldn’t go into the 40% tax bracket other than I believe the first payment when I would be put on emergency tax but this would be reimbursed. I could then reinvest this money – maybe in an ISA, give some to my sons or even spend it!”
Jasmine replies: This sounds like a slightly complicated situation but it’s great that you are considering it nice and early. You don’t say if your husband has his own sources of retirement income. I hope he does because otherwise he will need the extra annuity when you are gone!
However, for more specific information for your question, I first asked the financial advisor, David Braithwaite, from Citrus Financial.
He said “You are right in that when you “buy” an annuity you are set in the payments, and as most people would do, you look to see how long you would have to withdraw it to see if it represents goodvalue.
“Couple of points on this though,
1. the rate they have offered you would be based on your health, age, etc so the annuity provider will base their offer on that, so this would be “fair” but there are situations when the annuitant (the person taking out the annuity) lives longer than the break-even point, which is great, but also may not live that long so there is a sense of having “lost out” as you spent more than you withdrew.
2. “You can shop around – you may well find that other providers will offer you a more competitive rate than you have been offered, based on your personal health situation.
“With an annuity, once you have set this in place, it is risk-free, and the income you receive is guaranteed for life so relatively simple in terms of planning from that point on.
If you opted for the drawdown route, I would suggest you seek advice from a financial adviser (look on www.unbiased.co.uk to find one in your area or ask friends and family who they recommend) as there are tax implications of drawdown, both in terms of the withdrawals you make and also Inheritance tax following the recent budget.
“There is also investment risk as the value of your pension can rise and fall, as well as checking the pension contract to see what the options are as not all offer this, but an adviser can check all this for you as there are many moving parts not easy to answer here.”
Also, Daniel Abbott, Financial Advice Specialist at Hoxton Wealth said, “Firstly, are you certain the state pension is 28,500 per annum. It seems very high.
“With regards to the pension pot and the annuity, the important question is what are the expenditure needs? If the required income to cover expenditure is a further £5,100 or less then taking the annuity option will offer that guaranteed income for life and that security may be more valuable than the chance of losing out by both individuals passing away before the 14 years calculated as the breakeven point.
“Taking the pension funds and only paying 20 per cent is viable over a three to four year period by keeping within the basic rate band (up to 50,270 GBP per year).
“Then placing unused funds into an ISA each year would allow the funds to continue to grow as if still in the pension but without further income tax being applied.
“Ultimately, there are two questions: is the state pension alone enough for you to live on?
“If so, then taking the pension out over several years and putting it into an ISA makes sense as you would continue to get the tax free growth but would be able to extract it tax free when needed.
“The next question is around inheritance tax. Do you have assets over £1 million including you residential property? If not, then there is not likely to be any inheritance tax liability due to the Nil Rate Band and Residence Nil Rate Bands combined for both spouses.”
