It is probably fair to say that many over-50′s are unaware of the rule changes coming through effecting the pension and annuity market. A survey by a leading firm of independent financial advisers (IFA’s) reveals that 80% of 50-year-olds are ignorant of the imminent increase in pensionable age. Thousands of 50-year-olds who expect to be able to claim on their private pension plan next year will find the rug actually pulled from under them when they find out that the rules have changed and they must wait a further five years to utilise their pension.
From April next year the earliest age that men and women will be able to take benefits from their private pension will move from age 50 to age 55. This means that those born after 6th April 1960 (myself included…a month out) will not be able to take their pension benefits until after 6th April, 2015. However, there does seem to be a widespread ignorance of this change of rules, and according to the survey, a significant 80% of the people asked had no idea that these rules are about to change.
There are going to be some exceptions to the rule. Employment law usually overrides our pension law, so if a contract of employment does allow for retirement at age 50 (e.g. the Police Force) then this will still be a possibility after April, 2010. Natually, this is unlikely to apply to the majority of people and the financial implications of having to wait that four years or so could be harsh considering the current economic climate.
People who are currently aged 50 with a fund of £100,000 could expect to receive an annuity of around £5,480 per year, based on current annuity rates, but if they put this off until April, 2010 they would not be able to actually retire until 2014. If we then assume that over the course of the next five years the global recession might deepen and the fund only grows by, say, 10%, it will be worth £110,000.
However, because of increased longevity and lower interest rates, pension annuity rates may also fall by 10%, and you never know, both of these scenarios could occur. In this case and based on the assumptions of these 10% figures, they would receive an annuity of about £5,780 per year. Therefore, by having to delay their annuity purchase by five years, their income has increased only very slightly, but they will have lost five years of income at £5,480 per year.
Might there be an alternative? Well, a disadvantage of taking a pension annuity now is that you are tying yourself into a set of annuity rates for the rest of your life, which may be 20, 30 or even 40 years, and, if you fall ill at some point you will not be able to take advantage of an enhanced annuity or an impaired life annuity. If inflation picks up over time and you are on a fixed annuity income, this will be decimated by inflation. The basic principle is, yes, do something now, but consider all of your possible options.
As well as buying a conventional annuity, there are some alternative strategies. You could buy a with-profits annuity which can help to hedge against the ongoing effects of high inflation, should this occur. You could look at temporary annuities which are fixed for five years, with the option to then revisit the situation, again taking into account any changes in your circumstances.
Another option that warrants consideration is that of an enhanced annuity (or impaired life annuity) if you suffer from ill health or a regular smoker. These tend to pay higher incomes, sometimes much higher.
You might want to look at an unsecured pension (was income drawdown). These allow retirees to take an income now, have total flexibility with their pension fund investments, and the option to leave their whole pension fund to dependants in the event of their death, sometimes tax free.
Quite a lot to take in if you are in that fifty something age bracket and considering looking at annuity quotes as you plan for your retirement.
My thanks to Steve Hunt, of Rockingham Retirement, for some of his thoughts and views on this subject.
