Most annual pension fund statements will make grim reading this year. A quick look at the average 12-month performance of the some popular collective (managed) pension fund sectors says it all. UK All Companies funds were down over 30%. Balanced Managed, Global Equity and property funds all lost around 20%, or even more. Global Fixed Interest funds produced positive returns, with around 22%, and that was entirely down to the sliding value of our precious sterling against other currencies.
So, what if you are near retirement and have seen the value of your pension fund fall by 20% or more? One option is to carry on working, if you can, and revisit your investments to position them for a potential recovery to their mid-2007 levels sometime in late 2010 or early 2011, perhaps. But what if you do want to retire this year?
If you have insufficient capital or other sources of income to enable you to defer your annuity purchase, there are pension options to consider, perhaps by utilising an income drawdown product.
Example: a 65 year old male with a £100,000 pension fund would be entitled to tax free cash of up to £25,000. The balance of £75,000 could buy a net pension annuity income (assuming liability to basic rate tax) of around £350 a month at current annuity rates. Instead of buying that pension annuity, the whole fund is placed into an income drawdown plan (now called Unsecured Pension (USP)) and the tax-free cash is drip-fed at a rate of £350 a month. Even assuming no investment growth, the tax free cash could provide income at this level for around six years, allowing the pension funds to remain invested and potentially increase in value over this period.
To do this type of arrangement advice should be sought from an appropriately qualified and experienced financial planner.