Buy one annuity with several pensions?
|Retirement | Pension Rules
Asked by j4_twj, submitted
04 June 2011.
Coming up to 65, I find that, due to a varied career, I have three personal pension pots estimated to be worth about, £5k, £20k, and £50k. The terms of the contracts appear to mean that, effectively, I cannot transfer these before retirement/maturity without possible penalties.
My questions are:
is it possible for me to transfer all three at maturity into one pot to achieve a better annuity rate or can each provider insist I apply for an annuity separately?
If the latter is the case, does the '25% tax free commutation' apply to each pot separately or can I, say, commute the £5k pot, leaving me with turning the two larger pots into annuities.
Or is there a third way I haven't thought of?
Answered by Justin on 06 June 2011
Annoying that you can't transfer without penalty - many older personal pensions levy nasty penalties if you want to move to another provider (in part because they paid enormous sales commissions at the outset which they recoup over the life of the pension).
Annuity providers tend to give lower rates on smaller sums, so using a single annuity provider makes sense - especially as you'll likely want to use whoever's offering the best rate at the time for all three pensions.
Annuity providers normally allow you to combine several pensions when buying an annuity, so this shouldn't be a problem.
Technically there are two ways this can happen. The three pensions can be transferred 'as is' at retirement into a pension with the chosen annuity provider, from which the 25% tax-free cash can be paid and an annuity purchased straight away - this is called an immediate vesting personal pension. Or, the 25% tax-free cash can be paid out by each existing pension provider and the balance sent to the annuity provider who'll combine all three into one annuity - called an 'open market option'.
Pension providers must offer you an open market option (i.e. the ability to buy your annuity from another provider) while a immediate vesting transfer might be viable provided your existing providers cease to penalise transfers at retirement.
Both routes will probably lead to a wait and some stress at retirement because insurance companies tend to be rather inefficient at administration, but it's small price to pay if you can bag a better deal on the income you'll receive for the rest of life.
The 25% tax-free cash must be applied to each pension separately, although if you consolidate it'll be 25% of the combined £75k pot.
Before buying an annuity with another provider just check you won't lose any benefits, such as a guaranteed annuity rate, with your existing provider. I suppose the only reason for keeping the pensions seperate (aside from possible loss of benefits) is that it gives you the flexibility to take each pension at a different time, although.chances are you'll want all the tax-free cash and income when you retire.
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Readers' Comments (3) - To post a comment please register or login
Comment by j4_twj at 8:01pm on 06 Jun 2011:
Very helpful - both food for thought and also the knowledge to decide what to do, and then say "yes, I can". As for the stress - so what's new!
Comment by Islaylassie at 6:04pm on 14 Jun 2011:
j4_twj: I recently did what you're thinking about doing, namely combined three small pensions into one annuity (coincidentally the fund sizes were much the same as yours) using the open market option that Justin mentions. The quotes from various annuity providers were similar, but several were eager to match someone else's quote if I got a better one. In the end, Annuity Direct gave me the highest quote, albeit only by about £20 a year but every penny counts!
The process wasn't too stressful, although how long it all takes seems to depend on how long the various pension firms take to respond to requests for values and funds. All three companies paid a lump sum into my bank account (one payment appeared within about 4 days while the slowest took more than a fortnight), and sent the balance to the annuity company (not to Annuity Direct who are just the arrangers really).
Comment by BernieB at 11:10am on 18 Jun 2011:
My wife had 5 private pension pots from additional jobs she did as well as a teachers pension. She didn't understand why I insisted on this but is now very pleased. We had read it was best to get an open market valuation for the combined lot rather than get individual annuities from each, especially since a couple of the "pots" were quite small. Combining all this looked a bit daunting so we used Bestinvest on a fee-and-rebated-commission basis and everything went smoothly with no hassle.
My biggest message is that we fortunately moved everything into cash funds in the months leading up to her 60th birthday and the market crashed in the days just before her 60th birthday. I think we should have moved away from equities somewhat earlier but the market seemed to be rising at the time ......!