Converting Pension Pot into Lump Sum + Annuity RRS feed

  • Question

  • Hi,

    I'm about to cash in my occupational pension pot, part of which will be taken as a tax-free lump sum with the remainder being used to purchase a single-life fixed annuity, payable until death.

    I have the pension fund set up in Money 05 as an investment account with all the value in cash transactions. The lump sum I can just transfer from the pot to another account without affecting my actual net worth, but what would be the best way to handle the annuity?

    Sunday, October 21, 2012 8:55 PM

All replies

  • When you purchase an annuity you are purchasing an income stream, - monthly payments in exchange for a lump sum. One way to handle this is to set up an expense category "Annuity Purchase"  and show the annuity purchase as an expense assigned to this category.  Then set up an income category "Annuity Income" for the recurring payments from the annuity. 
    Doing this will decrease you net worth by the purchase price of the annuity because the MSMoney net worth calcualtion does not consider future income steams.

    Even single-life fixed annuities have different features, - especially with respect to the taxability of the payments.  You will need to map out the details of yours and set up MSMoney to properly reflect the accounting.  Be sure to consult with a trusted adviser who is knowledgeable about these investments and does not have a financial interest in selling them.

    Bill Becker

    Tuesday, October 23, 2012 2:07 AM
  • Thanks Bill,

    On reflection you're quite right. An annuity when purchased is actually worthless in present-day terms - as the future income potential can either be zero or more than than the original cost, or an unknown value somewhere in between.



    Tuesday, October 23, 2012 10:28 AM