Purchase of annuity

[rks]

Has anyone had experience of buying fixed term annuity?
Just asking as I had some quotes and spoken about legal and general fixed term annuity, eg for 100k pot quoted 5 year pay out at 19960 per year, includes death benefit for your partner ie still continues to pay out till end of term ect, does seem too good to be true but I did question them how they make their money.

[RobertT]

I would have thought they invest your money into gilts/bonds and get a few percent on your money each year, while paying you a set income that's effectively going down each year due to inflation(based on your post).

In my opinion and assuming your money is already in a pension, a better choice would be drawdown via a SIPP. You could put your money in similar investments, benefit from that few percent each year and have complete control over your money.

But it's obviously horses for courses.

[rks]

Hello, no will be paying into avc from this Oct when I pick up my nra60.

[stephen500]

Has anyone had experience of buying fixed term annuity?
Just asking as I had some quotes and spoken about legal and general fixed term annuity, eg for 100k pot quoted 5 year pay out at 19960 per year, includes death benefit for your partner ie still continues to pay out till end of term ect, does seem too good to be true but I did question them how they make their money.

Susprised at this:
My Royal Mail pension pot is £316,885.
I expect a combined pension (FS RMSPS/CSDB, section B) of around £11,200 a year
and combined lump sums with the addition of DBCBS into the mix of around £78,000.
But is your legal and general fund just paying out for 5 years?
It seems to me that our pensions are factored in with an expected life span of 20 years after retirement, ie they use this to calculate your pension pot against your life time allowance.
What happens to you after 5 years?
If you have three pots of £100k can you take out 3 seperate 5 year plans? And the question is, what happens after 15 years?

[rks]

Hello sorry , currently expecting to pick up nra60 pension this October. Will be carrying on working till 2025 and due to pick up nra65 then.
From what I have read paying extra into avc is a good way to reduce one's tax liabilities. That is if I don't then when I pick up my nra60 I will be paying at least 16k at 40% tax. Will lose child benefit element as 100% over the 50k threshold.
So seems like if I can pay 16k a year through my wages into avc I should benefit from 40% tax relief.
When I retire at aged 65, I will have contributed about 75k into avc pot. At that time I believe I can get 25% tax free LS from Avc. And also 25% LS from Rmpp.
My plan if its workable is to then transfer the remaining 75% of avc money to an annuity provider and draw down the money over 5 years, thus only paying 20% tax even adding rmpp pension I should be on lower tax rate.

[RobertT]

Hello sorry , currently expecting to pick up nra60 pension this October. Will be carrying on working till 2025 and due to pick up nra65 then.
From what I have read paying extra into avc is a good way to reduce one's tax liabilities. That is if I don't then when I pick up my nra60 I will be paying at least 16k at 40% tax. Will lose child benefit element as 100% over the 50k threshold.

So from age 60 you'll have a gross income of £66k+ per year?

So seems like if I can pay 16k a year through my wages into avc I should benefit from 40% tax relief.
When I retire at aged 65, I will have contributed about 75k into avc pot. At that time I believe I can get 25% tax free LS from Avc. And also 25% LS from Rmpp.

In that scenario there's no tax benefit of AVC's, over a personal pension. And if the plan is to transfer to a pp anyway(for annuity or drawdown), why bother with AVC's at all?
A pp will also have a much bigger choice of investments.

My plan if its workable is to then transfer the remaining 75% of avc money to an annuity provider and draw down the money over 5 years, thus only paying 20% tax even adding rmpp pension I should be on lower tax rate.

But why do you want a 5 year annuity? Infact why an annuity at all? Why not draw it down as and when you want it and/or over a longer/shorter period of time?
Drawdown and annuity are two different things!

Also bear in mind that paying into the current AVC's probably won't be possible once the CDC scheme is implemented. And have you also factored in your state pension, which will also be included in your income for tax purposes.

[Schiff]

But why do you want a 5 year annuity? Infact why an annuity at all? Why not draw it down as and when you want it and/or over a longer/shorter period of time?
Drawdown and annuity are two different things!

It seems that the OP is simply trying to be tax efficient, in which case I agree that simply using drawdown over whatever period to remain within the basic rate tax band is a far better idea than an annuity.

There is then the question of why the OP wants to get these funds out of a pension wrapper as quickly as possible. If they are simply going to be held in a savings account then the money saved in tax could quickly disappear when the low interest rates they are likely to get are compared with typical growth of investments in a pension fund. If the funds are going to be invested then what are the investments which can't be accessed through a pension fund?

[rks]

Hello thanks,
My aim is to if possible use earnings above 50k in each financial year to pay into avc / or other directly from my wages so I can utilise 40% tax relief.
Partner will then also benefit from getting full child benefit. That is I don't end up paying it all back when I do the self assessments.
I only want to continue doing this up until I get my NRA65 as then I will most likely retire, as then my total earnings will be below 50k pa.
So even if avc may only be around for another 2years? Is it not most efficient way to do this?
Want to be able to get back whatever extra I invest in during the 5 years up to age 65 as soon as possible without being penalised on tax, I'm not sure ow draw down works, is this not the same as the fixed term annuity I mentioned? Thanks for all info

[RobertT]

I believe if you pay into a pension, including AVC's, via your employer, you should automatically get 40% tax relief if you're a higher rate taxpayer. Although that might be something to check with RM.
If you pay into a personal pension, you will automatically get 20% tax relief and you have to claim the other 20% via your self assessment form.
Overall the result is the same!

Depending on what your basic pay is in relation to the minimum wage, you may not benefit from PSE when making the sizeable contributions you propose? PSE guide here: http://www.myroyalmail.com/sites/defaul ... %20WEB.pdf" onclick="window.open(this.href);return false;
So if you will benefit from PSE, AVC's are the better option compared to a pp, but the savings in NIC's go down, the more you earn.

If you transfer your AVC cash to a pp or just save via a pp, then in general terms the quicker you access it, the more income tax you're likely to pay. Spreading it out over a longer time may reduce your overall tax bill. But it'll obviously depend on personal circumstances.

An annuity generally runs until you die, with the option of having spouses benefits on your death. There are also fixed term annuities that just pay out for a set period of time.

Drawdown is where you effectively use your pension pot as bank account. There are limitations on how often you can take money out(depending on the provider), but you can withdraw cash for as long as there's money in the pot.

Here's a link telling you what you can do with a defined contribution pension: https://www.moneyadviceservice.org.uk/e ... on-schemes" onclick="window.open(this.href);return false;

And here's some info on drawdown: https://www.moneyadviceservice.org.uk/e ... s-drawdown" onclick="window.open(this.href);return false;

[heapsy]

If, for whatever reason, someone only wanted a five year annuity, then why not just use some / all of the AVC money over that period, tax free? Although personally I probably wouldn't do it myself.

[rks]

Thanks all,
Are you saying that I can simply use the rest of funds in avc as drawdown, even though I will have left the rmpp and most likely royal mail?,
One more question please if I want to reduce my earnings by 15k do I contribute 15k into avc or will it be 15k - 40% ie 9k as higher rate payer?

[rks]

Iv calculated that if I choose not to pay into say avc I will en dup paying approx 23k tax more after 5 years, due to being higher rate payer this includes approx 1k a year for child benefit loss.

[RobertT]

Thanks all,
Are you saying that I can simply use the rest of funds in avc as drawdown, even though I will have left the rmpp and most likely royal mail?,

You can take your AVC funds in 3 ways:

1. To fund some or all of your tax free lump sum when taking your main scheme benefits. In your case that will just be with your NRA65. So in practice and depending on the value of your DBCBS pot and any standard lump sum(section A/B), you may end up paying tax on a big proportion of your AVC fund.

2. At the same time as taking your main benefits, you can take 25% of your AVC cash and convert the rest into an annuity. Generally that annuity would provide an income for life rather than a fixed term.

3. Transfer out your AVC cash either before or after taking your main scheme benefits to a personal pension. You can then take up to 25% tax free and drawdown the rest as and when you wish.

There is no option to transfer any AVC cash for drawdown once you've taken your tax free lump sum in options 1 or 2. It has to be done as a separate transaction as in option 3. And that can be done anytime up to age 75 whether you're still in RM employment or not.

One more question please if I want to reduce my earnings by 15k do I contribute 15k into avc or will it be 15k - 40% ie 9k as higher rate payer?

AVC's have to be paid via payroll, there is no option to pay in lump sums by cheque as there once was!
So that would be a gross of £1,250 per month(the amount on your payslip), but factoring in the 40% tax relief, your net pay would only go down by £750 per month, because the taxman is paying the other £500.
Plus if you're within the limits for PSE, you'll save a bit on your NIC's too

[rks]

Thanks Robert

[rks]

Hello Robert,
I wanted to get confirmation from rmpp about the tax relief when paying into Avc, you think I need to ask again as I got the following answers which don't seem correct?
There has been no mention of any AVC stopping with the new CDC scheme.



We do not offer a drawdown but you can take the AVC with the pension if you wish.



The AVC payment that is taken out of your wage is done before tax so if you decide to put in £1500 that is the amount that will go into the AVC.



The AVC is tied to the RMPP but you can take the AVC with you 60 or 65 pension.

So How do you read that Robert about tax relief?
I guess only way to see or check perhaps of how much tax relief is being applied when paying into avc is by calculations on wage slip?