The bigger question: if you delay the purchase of your pension annuity might your pension fund grow sufficiently to produce a greater annuity income over time?
Example Mr. and Mrs. A. are in their mid 50s and planning to retire in the fairly near future. However, recent economic events have impacted greatly on their chances of providing themselves with the retirement income that they need. What factors should they consider when it comes to planning for their retirement?
On a general basis it would make sense to try and reduce the investment risk within their pension fund as they approach retirement. They need to be as sure as possible of the retirement income they might get. If the value of their pension fund falls dramatically before their intended retirement date, it might mean that they might either not be able to generate the income in retirement they would like and they might not have the time to remain invested long enough to try and recover the losses in their pension arrangements.
It is pretty impossible to offer definitive advice because of the various individual factors such as the size of the pension fund, other assets, the possibility of ill health, and the attitude to risk.
But if they have enough liquid assets, it might be a good idea to pay more into the pension arrangements because they would receive a further 20% on the contribution via basic rate tax relief and, with a further 20% if a higher rate tax payer.
The likelihood is that interest rates will come down even further, impacting on the pension annuity rates that might be available in the future. Naturally, taking example annuity quotes might help paint a picture, but it is the value of the pension fund that will really make a difference.
Let’s look at a pension fund of £100,000 that might generate an annuity income of around £5,000 a year. If a deferred annuity purchase is delayed for two years then £10,000 gross income that could have been taken is not received. The question is whether the pension fund would have grown enough in those two years make an improvement on the annuity income then taken?
Perhaps a year or so ago a fund in the safest environment possible might grow by 5% gross a year – in some sort of cash/deposit fund. On a fund of £100,000 this would equate to £10,000 of growth. In turn, this means that the annuity income in two years time might be £5,500 a year. Doing the (easy) sums would suggest that it could take approximately 20 years to replace the £10,000 of income that could have been received during the first two years. Is it worth it?
Delaying an annuity purchase is not an easy decision to take, though maybe easier if you have a large pension fund, other sources of income, and advice should be taken from the likes of Origen before taking this route.
Pensions are becoming more flexible these days in terms of how you can take your benefits. There are a whole host of pension options to consider when planning your retirement income. It’s not just about annuities any more.
