Becoming a Pensioner in Two years

**Sysman** · 8 February 2014, 14:38

Originally posted by BigRed View Post

I've just received a letter regarding a deferred final salary pension that I hold. It seems that they won't let me defer it past their normal retirement age of 60 so I will start receiving an RPI linked pension of £10,000 in 2016. The remainder of my pension is in a SIPP plus the state pension which will kick in at 65 and include S2P (I think, even though the government are introducing a new higher flat rate scheme?). I intend to carry on working (well the wife intends me to carry on). I feel I need to talk to a pensions adviser but I would like to be armed with some information before I pay out for someone so I know if he has a clue.

I'm assuming it would be really stupid to transfer it to my SIPP if only because my wife is a lot younger than me and will get 60% after I die, she'd have no chance from purchasing an annuity as they only expect 5 years difference and hammer you for that.

Can I still pay into a SIPP while receiving a pension? it seems a bit strange to me

Have you seen the latest annuity rates by the way, annual return per £100,000 invested:

hmm, looks great in the edit but the alignment goes to pot in the post.

Does this look better?

Code:

                 Age                              55      60      65      70      75
Single life, level, no guarantee                £4,961  £5,373  £6,020  £6,842  £7,968
Single life, level, 5 year guarantee            £4,955  £5,361  £5,994  £6,782  £7,907
Single life, RPI, 5 year guarantee              £2,433  £2,916  £3,534  £4,266  £5,432
Single life, 3% escalation, 5 year guarantee    £3,068  £3,507  £4,154  £4,974  £6,146
Joint life 50%, level, no guarantee             £4,694  £5,059  £5,510  £6,239  £7,174
Joint life 50%, 3% escalation, no guarantee     £2,805  £3,189  £3,690  £4,383  £5,360

**BigRed** · 8 February 2014, 15:52

Thanks, it looks clearer, just as depressing though.

There must be some other old codgers on here who have dealt with similar issues?

**mudskipper** · 8 February 2014, 16:33

What do level, escalation, guarantee etc mean?

I always took as a rule of thumb that you should have £100K for every £5K of pension you were hoping to get.

**AtW** · 8 February 2014, 16:38

Originally posted by mudskipper View Post

I always took as a rule of thumb that you should have £100K for every £5K of pension you were hoping to get.

That was before QE.

**BigRed** · 9 February 2014, 00:09

Originally posted by mudskipper View Post

What do level, escalation, guarantee etc mean?

I always took as a rule of thumb that you should have £100K for every £5K of pension you were hoping to get.

This bit I do understand, basically when you have handed over your £100,000 level means you get the amount quoted every year without any provision for inflation. If you retire at 60 and live another 20 years you can find your purchasing power has halved. work out 3% compound interest in a spreadsheet and play with the percentage and years to see the effect.

Escalation means your pension will grow by the percentage quoted each year to protect you from inflation. I think this is normally the maximum, they normally say something like 3% or the RPI, whichever is smaller.

Guarantee means that they will pay at least a set number of years pension. Generally you hand over your £100,000 and they pay out their pittance until you die, they keep whatever remains and potentially take a loss if you live to be 100+. Without a guarantee, if you die a month after taking your pension they have paid out their £5,000/12 and pocket the rest, with a guarantee they pay the remainder of the first 5 years pension into your estate.

Joint life says they will pay you (presumably male) the rate quoted until you die but will also pay 50% of your pension to your spouse until she dies. When you reach the small print they normally only allow an age difference of the wife being 5 years younger because women live longer anyway and men tend to marry younger partners so they get hit by a double whammy. This option came about when the men earned all the money and the woman stayed at home so had nothing to fall back on if the husband died.

Because people are living longer on average the 5 year guarantee doesn't cost a lot extra, but you have to ask if it is worth bumping up your estate value when you die. Joint life may be worth it if you have a slightly younger wife but if they have their own pension arrangements is probably best avoided.

If you are in good health and retiring at 60 you can probably expect another 20-30 years so an escalation can be very important. On the other hand life expectancy and life quality are two different things and you may expect to spend the last 5-10 years in a nursing home, which will go through money at an incredible rate, so you might as well squander it while you can enjoy it.

From memory, the basic state pension is around £110 a week and the minimum guaranteed income is £145, so the first £1,800 p/a is basically saving the government money. The average personal pension fund is around £50,000, which will gain you absolutely zero additional income. No wonder the government are encouraging people to save for their retirement. The new reforms plan to scrap the S2P pension and pay an enhanced state pension which matches the minimum guaranteed income though.

What gets me is that £100,000 up front will earn you 3.5% a year for a single person 3% escalation pension. Decent long term investments should get you at least 5% pa. so they basically take your money, pay out less than they make on their investments, then pocket the original cash when you die.

**BrilloPad** · 9 February 2014, 05:49

Originally posted by BigRed View Post

What gets me is that £100,000 up front will earn you 3.5% a year for a single person 3% escalation pension. Decent long term investments should get you at least 5% pa. so they basically take your money, pay out less than they make on their investments, then pocket the original cash when you die.

Yes. But you do get tax relief on the way. Thats the only good thing about a pension.

I reckon hyper-inflation means I will see almost none of my pension. But putting 2 fingers up at the taxman is nice.

**mudskipper** · 9 February 2014, 07:57

Originally posted by BigRed View Post

...

What gets me is that £100,000 up front will earn you 3.5% a year for a single person 3% escalation pension. Decent long term investments should get you at least 5% pa. so they basically take your money, pay out less than they make on their investments, then pocket the original cash when you die.

Thanks, good explanations. I've got a few years to go yet, but a 500K pension pot to give a reasonable income does seem unlikely.

I've recently moved my pension to a SIPP - seems you can do "income drawdown" which (I think) allows you to carry on managing your own fund - obviously riskier, but gets over the above scenario.

Explanation here Income drawdown rules | How does an income drawdown pension work?

**BigRed** · 9 February 2014, 14:45

Yes, I have SIPP with Hargreaves Lansdown, I moved a couple of small personal pensions into it that were going no-where fast. It gives me some money to play on the stock market. Having looked at the income drawdown rules again it looks like a good option to pass on funds to your spouse or descendants.

I hadn't realised the requirement to convert to an annuity by age 75 had been removed, so you can withdraw a pension and pass the fund value on to your dependants.

Becoming a Pensioner in Two years