Question
I have an in-house AVC to supplement my final salary scheme pension, the rules of the AVC allows me an option of implementing the 'State Spreading Scheme Option' (SSSO) which lets me draw a temporary pension from my actual retirement to my state pension age, entitlement is up to a maximum of 125% of the value of a single person's basic state pension.
I have £52000 in my AVC and am planning to take 25% as a tax free lump sum leaving me £39000. I plan to retire at 59 years of age therefore I have the option of using the SSSO which would give me a gross of £121 per week until I reach 65 or an annuity of £37:50 per week for life.
My health is reasonably good (on high blood pressure tablets), and am reasonably fit.
Which option would you suggest?Answer
Under current pension rules you can take benefits from an AVC pension anytime from age 55, regardless of whether you're already receiving an income from the main pension scheme.
It sounds as though your pension scheme allows this, as you can take the 25% tax-free cash and then buy a £37.50 weekly income for life with the balance. But you also have the option to instead use the State Spreading Scheme Option (SSSO) to provide a higher weekly pension income until your state pension kicks in.
The benefit of SSSO is that you can receive more income now, but this will cease after 6 years when you reach 65. Buying an income for life means much less income now, but it could be paid for a lot longer.
Assuming you don't need the extra income now, then the decision is really a gamble on whether you'll for long enough to benefit from the income for life over the SSSO income.
The SSSO would provide income of £6,292 a year for six years, a total of £37,752. If you select the £37.50 per week option, £1,950 a year, you'd need to live until about 78 to be in profit (the average life expectancy for a male aged 59 is around 85-86).
However, an accurate comparison is more complicated. If you don't spend all the higher income now you could earn a return by saving or investing it, And if we assume the income is flat (i.e. not index-linked) then inflation means the income will buy progressively less in future, making higher income now more valuable.
So if you only spend the first £37.50 per week of the £121 SSSO pension and earn 6% a year from investing the rest (from which you continue to draw a £37.50 weekly income from 65), the breakeven age rises to around 100 - suggesting taking the SSSO would almost certainly be more profitable. However, investment returns can vary widely - e.g. if they averaged 3% a year the break even age would be around 82.
If you don't need or want the extra income now then your decision basically boils down to risk. Both how long you'll live and the amount of saving/investment returns you could get on the money.
If you're comfortable taking some investment risk and/or believe your life expectancy is below average then the SSSO may likely prove more profitable. But if you don't like taking investment risk and/or expect to live a reasonably long life then the £37.50 per week option may prove better.
I've ignored the possibility of an index-linked income and spouse's pension, which may or may not be options available to you. Index-linking (i.e. pension income rising by inflation) becomes more worthwhile the longer you live, while a spouse's pension can be valuable if you expect your wife to significantly outlive you.
Sorry I can't give a definitive answer (I don't think one exists), but hopefully the above will help you make a sensible decision.
I have an in-house AVC to supplement my final salary scheme pension, the rules of the AVC allows me an option of implementing the 'State Spreading Scheme Option' (SSSO) which lets me draw a temporary pension from my actual retirement to my state pension age, entitlement is up to a maximum of 125% of the value of a single person's basic state pension.
I have £52000 in my AVC and am planning to take 25% as a tax free lump sum leaving me £39000. I plan to retire at 59 years of age therefore I have the option of using the SSSO which would give me a gross of £121 per week until I reach 65 or an annuity of £37:50 per week for life.
My health is reasonably good (on high blood pressure tablets), and am reasonably fit.
Which option would you suggest?Answer
Under current pension rules you can take benefits from an AVC pension anytime from age 55, regardless of whether you're already receiving an income from the main pension scheme.
It sounds as though your pension scheme allows this, as you can take the 25% tax-free cash and then buy a £37.50 weekly income for life with the balance. But you also have the option to instead use the State Spreading Scheme Option (SSSO) to provide a higher weekly pension income until your state pension kicks in.
The benefit of SSSO is that you can receive more income now, but this will cease after 6 years when you reach 65. Buying an income for life means much less income now, but it could be paid for a lot longer.
Assuming you don't need the extra income now, then the decision is really a gamble on whether you'll for long enough to benefit from the income for life over the SSSO income.
The SSSO would provide income of £6,292 a year for six years, a total of £37,752. If you select the £37.50 per week option, £1,950 a year, you'd need to live until about 78 to be in profit (the average life expectancy for a male aged 59 is around 85-86).
However, an accurate comparison is more complicated. If you don't spend all the higher income now you could earn a return by saving or investing it, And if we assume the income is flat (i.e. not index-linked) then inflation means the income will buy progressively less in future, making higher income now more valuable.
So if you only spend the first £37.50 per week of the £121 SSSO pension and earn 6% a year from investing the rest (from which you continue to draw a £37.50 weekly income from 65), the breakeven age rises to around 100 - suggesting taking the SSSO would almost certainly be more profitable. However, investment returns can vary widely - e.g. if they averaged 3% a year the break even age would be around 82.
If you don't need or want the extra income now then your decision basically boils down to risk. Both how long you'll live and the amount of saving/investment returns you could get on the money.
If you're comfortable taking some investment risk and/or believe your life expectancy is below average then the SSSO may likely prove more profitable. But if you don't like taking investment risk and/or expect to live a reasonably long life then the £37.50 per week option may prove better.
I've ignored the possibility of an index-linked income and spouse's pension, which may or may not be options available to you. Index-linking (i.e. pension income rising by inflation) becomes more worthwhile the longer you live, while a spouse's pension can be valuable if you expect your wife to significantly outlive you.
Sorry I can't give a definitive answer (I don't think one exists), but hopefully the above will help you make a sensible decision.
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