The question, from Mrs A Downes, 72 from Kent
I have a small private pension pot, current value c£24k. I know I must turn it into an annuity within the next 2+ years and would like to realise the maximum income, can you advise please? I am single and childless. If I die before arranging an annuity does the whole amount become part of my estate please?
The answer, from Mike MacLeod CFPTM at Everett MacLeod Limited - an Accredited Financial Planning FirmTM
This is a very topical query as the subject of ‘small private pension pots’ and turning these into an ‘annuity’ has been in the press recently. Please remember that I am unable to give specific advice as that requires a much more detailed understanding of your specific circumstances but I can give you some relevant facts.
The key points are:
- When do I have to ‘turn it into an annuity?’
- Realising the ‘maximum income’
- Effect of being ‘childless and single’?
- What happens if I die before arranging an annuity?
In order to enjoy the option to take a ‘Pension Commencement Lump Sum’ of 25% of the pension pot you must take benefits from the pension policy by your 75th birthday. This is currently drawn ‘tax free’ and is usually seen as a plus point by tax payers. If your circumstances warrant it you might look at more complex arrangements such as ‘Income Drawdown’. Details of your options can be found at http://www.hmrc.gov.uk/pensionschemes/pen-options.htm.
Releasing the maximum income involves you understanding your needs and wishes and then using the ‘Open Market Option’ to buy the best possible income. You should review your health and any lifestyle factors and consider applying for an ‘enhanced’ or ‘impaired life expectancy’ annuity if there is anything that suggests you may not live as long as the average person of your age. You must also decide how important ‘inflation protection’ is to you as you will be offered a higher starting income if you do not need it to increase but that could leave you in difficulty in future years as inflation erodes what you can buy with that fixed amount.
Being single and childless may make your annuity decision easier as you can simply buy a ‘single life annuity’ rather than have to consider the needs of financial dependants you leave behind. Traditional annuities do not have a ‘death benefit’ so the entire pension pot is used up when you make your annuity decision.
If you die before arranging an annuity the specific clauses of the pension contract kick in. Often the owner of the policy has completed an ‘Expression of Wishes’ for during their lifetime and this will allow the proceeds to be paid quickly to the named beneficiaries. Where this happens the proceeds pass free of inheritance tax. If no expression of wishes is found there is no option but to have the policy proceeds be part of your estate and this may lead to more Inheritance Tax being paid.
I hope this helps you with your decision making. I do suggest you consider paying for advice, and perhaps a full Financial Plan, at this critical point in your financial life.
Mike MacLeod CFPTM
Everett MacLeod Limited