Should I take pension guaranteed annuity rate?
|Retirement | Annuities
Asked by Crouton, submitted
15 November 2014.
I have £100 k in a pension fund with a guaranteed annuity rate of 8.6%, I have to decide soon whether to take this or lose it as it is due early next year when I am 60.
This is around 20% of my total pension funds. I am still working part time and intend
Sacrificing part of my salary to pay in to a company pension scheme (employer adding equivalent of NI contribution)
I would use the GAR pension to fund this. Does it seem like a good idea ?
Answered by Justin on 15 November 2014
In simple terms this sounds like a good idea, albeit with some potential caveats.
A guaranteed annuity rate of 8.6% at age 60 is very attractive given current rates; a level annuity with no spouse pension for a non-smoking 60 year old male is around 5.3% at the time of writing.
However, many guaranteed annuity rates are only available for a level pension (i.e. not inflation-linked) with no pension for a surviving spouse if they outlive you. This could be a big issue if this was your only pension fund, but since it’s only around 20% of your overall pensions you may be comfortable with this.
Also bear in mind that pension income is taxable. If you take income while you’re still working check whether it will push you into a higher tax band, although your plan to sacrifice salary may well mitigate this.
Perhaps the final consideration, which may be impossible to answer, is how long you expect to live.
If you were to die just a few years after taking the annuity (assuming there is no spouse’s pension) it would prove poor value. And vice-versa if you live for quite some time.
If the pension were instead left untouched in your pension fund and you die before age 75 then your nominated beneficiary can receive the whole pension fund as a tax-free lump sum. And, from April 2015, pension rules are due to change so that the same applies even if pension benefits have been taken (i.e.. you take up to 25% tax-free cash and leave the balance invested to draw an income).
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Comment by Crouton at 11:38am on 21 Nov 2014:
Thanks for your comments, they were helpful. It's due next April
Insurer has offered 8.1% for 5 year guarantee and 50% spouse pension. Would hope I've got another 15+ years left in me yet so will optimistically take it and use it to help fund to the maximum my salary sacrifice scheme ,keeping tax to the minimum, for the next three years and then combine with drawdown on the rest to fund my retirement.