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Pensioner income and annuities
My client is due to reach retirement age in Jan.
He has two pensions both of which have the option to buy an annuity as well as options for regular payments/ lump sum splits direct from the provider.
When calculating his benefit entitlement can I use the amount the provider says will be the regular amount or do I have to factor in what he would get if he bought an annuity?
Hope this makes sense.
A few questions and points.
What kind of ‘pensions’ are these? There are a variety of schemes which work quite differently.
DB (defined benefit) schemes provide a regular income, normally tied to final salary amounts. Gold standard.
DC (defined contribution) schemes where the money paid in is invested in a scheme or master trust and the final value will depend upon the value of the investments when withdrawn. The last couple of months have seen some very substantial falls in value for some of these schemes. That’s particularly true for what’s been seen as low risk Gilt based schemes.
SIPPs where the contributions are self invested, sometimes in some ‘interesting’’ investments.
If he has a DC scheme, which sounds likely, then he very probably has a lot more options than you’ve mentioned.
An annuity will be deducted penny for penny from any means tested benefit, so that may not be the best choice.
If he crystallises the pension value the there are some tax issues as well. Probably a 25% tax free amount and the rest taxed as if it were income. If MTBs are in play then it’s very likely that drawdown, keeping capital held below £6k / £10k could work out the best deal in pure income but it will depend on total value.
Have a look at some of my pensiions postings in my blog. https://benefitsinthefuture.com/category/pensions/
Hi Gareth
Thanks for your response.
He has two pensions. One is definitely DC (Phoenix Life). The other (tesco occ p) is not so clear.
Both offer the opportunity to buy an annuity.
CPAG handbook suggests that someone with a DC pension is expected to buy an annuity or take the equivalent income that would be payable through an annuity. Income that you draw down from your pension pot is compared to the amount you could get through an annuity and whichever is higher is taken into account.
The Phoenix Life (defo DC) pension is giving a lump sum figure only although variables are possible.
The Tesco pension does provide a regular payment value.
But, if he bought an annuity with the value of the pot(s), presumably that might provide a greater regular amount and, if he doesn’t, pension credit could use the higher figure anyway?
CPAG handbook suggests that someone with a DC pension is expected to buy an annuity or take the equivalent income that would be payable through an annuity. Income that you draw down from your pension pot is compared to the amount you could get through an annuity and whichever is higher is taken into account.
I wouldn’t phrase it like tha, Compulsory annuitisation ended with the pension freedoms but some old schemes are still saddled with old scheme wording which doesn’t reflect the current situation.. If you don’t take an annuity then, instead, the untaken pot is valued as a notional income which is calculated using the GAD tables and 15year Gilt rates. All the Gilt kerfuffle of recent weeks has meant that the notional income value has shot up because yiels have shot up (while Gilt prices have shot down causing real falls in value for many people.). If you take nothing, or a smaller amount than the calculation assesses then the assessed amount is used, if you take more then the actual figure is used.
The Phoenix Life (defo DC) pension is giving a lump sum figure only although variables are possible.
The Tesco pension does provide a regular payment value.
But, if he bought an annuity with the value of the pot(s), presumably that might provide a greater regular amount and, if he doesn’t, pension credit could use the higher figure anyway?
I’m not clear of the difference between getting an annuity OR getting a regular income. are they talking about regular drawdown being set up?
It’s also likely to be the case that the sums being talked about by the providers could be bettered by using a different supplier, which of course he can do, and certainly should get comparisons.
Hi Gareth
For example, the Tesco pension provides illustrations based on his pension pot. Lump sum plus regular amount or no lump sum and larger regular amount. So far so good.
However, he also has the option to buy an annuity with the pot, which might result in a higher regular amount.
When I do a benefit check for this guy, on the info I have, the option to take lump sum from Phoenix life and regular payment (no lump sum) from Tesco gives him an award of about £1.50 pw PC and full HB. Very tight as capital would exceed 16k.
So, if the Pension Service calculate his entitlement based on what he could get if he took out an annuity, my calculation goes out the window.
The bit I quoted from CPAG earlier suggests that the PS can use a notional annuity figure if the claimant chooses not to take an annuity.
If this is the case, I cannot accurately check entitlement unless I know what the annuity figures would be.
This is my dilemma.
You can find out more about pension freedoms and benefits in our factsheet
Important to understand that you can advise your client of the effects of their choices about their pension pots on their benefit entitlements but you shouldn’t offer any advice about which pension option they decide to go with as that is regulated financial advice.
You can also look at https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise for more useful information.
If this is the case, I cannot accurately check entitlement unless I know what the annuity figures would be.
This is my dilemma.
You can work out the figure using one of our reckoners.
Notional Pension Income Reckoner
Untaken pension savings, for those over state retirement age, are treated as generating a notional income for pension savings. This is a complex calculation using the client’s age, savings, current 15 year Gilt rates and values from Government Actuaries Department tables of notional annuity values.
They’re at https://www.webreckoners.com/. The whole lot would cost an individual £12.50 a year or £25 for the advice centre. (plus VAT). Unfortunately it’s not one of out free access reckoners.
Thanks Gareth
I think we will probably get that.
So, I am I right in thinking that even if my client takes a regular income from either or both of these pensions, the PS might treat him as having a higher income because an annuity would have paid more?
Or, do they only use a notional annuity income if the pot is left untouched?
It depends on what type of ‘regular income’ is being used. The most effective way, for many people, to use their savings is irregular drawdown, when the money taken is used as capital. If you keep the amount held below £6k / £10k then the money taken has no effect on benefits. As you drawdown more then the amount saved falls and the notional income falls as well. Take drawdown regularly and it becomes income, with penny for penny reduction in benefits. Here the amount used will be the highest of notional income or amount actually taken.
I’ve used your notional pension income calculator and, if I’ve done it correctly, the notional income is considerably less that Tesco are proposing to pay PA anyway. Is this likely?
Do you want to PM some numbers so that I can confirm it?
As for What Tesco are offering, I have no ieda what they’re offering.
You can find out more about pension freedoms and benefits in our factsheet
Important to understand that you can advise your client of the effects of their choices about their pension pots on their benefit entitlements but you shouldn’t offer any advice about which pension option they decide to go with as that is regulated financial advice.
You can also look at https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise for more useful information.
Thanks Paul.
Yes, have made it clear I just do benefits and I’m not a financial adviser!
Factsheet very helpful thank you.