Delaying tactics with your pension... could this be a costly choice?

If you are looking to retire shortly, you may be wondering whether you can afford it and how much of your retirement “wish list” will become a reality... the holidays you have planned, more time on the golf course or visiting family to name but a few.

Well, the reality is that falling annuity rates means it is now even more important than ever to make the right decision when it comes to securing an annuity from your pension fund.

Get it wrong and it could cost you hundreds or even thousands of pounds. Over a typical 18-year retirement timescale, a pension pot of £50,000 would today generate £10,224 less income compared to two years ago (source 2013 MGM Advantage Annuity Index), so it might seem tempting to delay purchasing an annuity in the hope of securing a higher level of income in a few years time. However, this could prove to be an extremely costly decision.

According to an Avelo Comparison report dated 3 June 2013, a 65-year old person with a £50,000 pension fund could purchase a single life annuity (with no guarantees paid annually in arrears) for £2,995.08 per year. A 67-year-old person with the same size fund could secure £3,148.56. This means that the 67-year-old would earn £153.48 per year more income than the 65 year old, but there is a huge potential downside. By delaying for two years the 67 year old would lose out on £5,990.16 worth of income and even taking into account the additional income per annum of £153.48, it would still take them around 39 years to recoup the lost pension and break even at the ripe old age of 106!

There is a possibility that delaying the purchase of your annuity for a couple of years could see your pension fund grow and provide a higher value when you eventually take your pension but the opposite could also be true.

It is no longer wise to accept your pension providers’ annuity quotation alone. You should consider utilising your “open market option” to compare the level of annuity income with other companies.

The difference can be as much as a 30% increase in your retirement income and can include enhanced annuities; available for a wide range of medical conditions depending on your health or that of your spouse.

Therefore taking financial advice is strongly recommended to ensure that your annuity quote is personalised to you and is the best option for your overall circumstances.

There are also alternatives to taking an annuity, which can be discussed. Obtaining financial advice will enable you to feel more confident with the choices you have to make and ensure that your retirement “wish list” goes full steam ahead rather than on the back burner! 

This article is for general information only and reflects the views of the author only. You should seek professional advice in respect of your own circumstances. 

For further information please contact Shipman Financial Planning Ltd, 1 Barnfield Crescent, Exeter, EX1 1QY, telephone 01392 278491 or email info@shipmanfp.co.uk.