I will soon be 60 and have a collection of different personal pensions. I am already being sent paperwork from the insurance companies but I do not really want to retire yet. Is there anything I should be doing?
Several years ago, the answer to this question would have been very simple. However, times have changed dramatically. Pension funds used to be completely tax-free, continued to grow with good returns and annuity rates became better the older you were.
Today, the open-market annuity rate is often worse than the guaranteed annuity rate. Add to this the ever worsening financial position of several insurance companies and the stealth tax on pension funds and my advice could be quite different, even if you wish to continue working.
Where the funds are well invested with no penalties and no guaranteed annuity rate, then, accepting that annuity rates might fall, it is probably best that you leave these alone.
Looking at those policies which contain guaranteed annuity rates, do the types of annuity suit your circumstances and are they available only now on your 60th birthday? Generally speaking, if they continue into future years, then you may well consider it best to defer taking benefits.
However, there is a very simple mathematical calculation which might change your mind. If you have a fund of £100,000 and a guaranteed annuity rate of 10 per cent, then, for the next five years, you will receive £10,000 a year, which will be liable to tax.
If you defer taking benefits and we look to the guaranteed annuity rate at age 65, which, let us say, is 11 per cent, all we have now to calculate is what growth we can assume on the fund between now and age 65. If we assume only a modest net return of, say, 3 per cent a year, then the £100,000 becomes a little over £115,000, which, with the guaranteed annuity rate at 65 of 11 per cent, produces a pension of £12,650 a year.
Ignoring the consequences of tax, by taking your pension now you will receive a gross £10,000 a year for five years, totalling £50,000. By delaying taking your pension for five years, you could receive an extra pension of £2,650. As you can see, it will require some 18 years before you recover your money.
These figures point me very clearly in the direction that you might be best served by taking benefits today. If you factor into this equation the fact that you will be able to take some of your monies as tax-free cash and invest that money, then the mathematics move even further towards drawing benefits today.
We will have to look at those policies that are invested in with-profits funds. Unfortunately, what used to be a relatively straightforward investment is no more. Most insurance companies are standing by their promise to provide full benefits without penalty at the normal retirement date. If the normal retirement date under your policy is 60, then, while most of the leading insurance companies will continue to stand by that promise, should you retire at a later age, some reserve the right to apply a market value reduction. These issues need to be clarified in writing before a decision is made to defer taking benefits.
Finally, there is the status of the insurance companies involved. You do not need me to mention the many insurance companies that continue to receive very bad publicity. Thankfully, the economic climate appears to be calming down and the fear of an insurance company becoming insolvent is lessening.
However, I am not at all comfortable with several leading companies and, if you have the option of drawing benefits today with the guarantees that an annuity provides you, I will probably recommend taking benefits rather than deferring.