A delayed pension can be costly choice

Published on Friday 13 February 2009 19:51

"Will the value of the fund grow to produce a greater income over time?"

Q My wife and I are in our mid 50s and we planned to retire in the fairly near future. However, recent economic events have impacted our chances of providing ourselves with the income that we need. What factors should we consider when it comes to planning for our retirement, given the current problems?

PB, Aberdeen

A Generally speaking it makes sense to try and reduce the investment risk within your pension as you approach retirement. You want to be as sure as possible of the income to expect in retirement. If the value of your pension fund falls dramatically before your intended retirement date, it might mean that you either will not be able to generate the income in retirement that you ideally would like and you might not have the time to remain invested to try and recover the losses, or it may be a time when the markets are essentially going against you – such as now.

It is impossible to offer definitive advice because of individual factors such as the size of your pension fund, your other assets, your health and attitude to risk.

But if you have enough liquid assets, it might not be a bad idea to add to your pension fund because you receive a further 20 per cent on your contribution via basic rate tax relief and, if you are a higher-rate tax payer, then you can claim a further 20 per cent relief through self-assessment. In the current climate, where the outlook for investment growth is not too positive and returns from cash are very low, an additional 20 per cent on day one is quite a sizeable benefit.

The likelihood is that interest rates will reduce further, impacting the annuity/pension rate that you could receive in the future.

You are probably wondering that, if you do not take your pension now, will the value of the fund grow to produce a greater income over time?

For example, let's assume that a pension fund of 100,000 might generate an income of around 5,000 a year (assuming no tax-free lump sum is taken) and if you waited for two years then you have not received 10,000 gross income that you could have. Over the two extra years that the pension fund remains invested how much is it likely to grow by? A year or so ago I might have said to someone that if you could grow your fund in the safest environment possible, then you might expect to see it grow by 5 per cent gross a year in some sort of cash/deposit fund. On a fund of 100,000 this equates to 10,000 of growth. In turn, this means that your pension in two years time might be 5,500 a year.

So you will have passed up 10,000 of income to increase your income to 5,500 a year going forward. Therefore, it takes approximately 20 years for you to replace the 10,000 of income that you could have received during the first two years.

However, if you delay for two years or so in the current climate, what sort of return are you going to achieve and should you be taking the risk anyway?

Only if you have a large pension fund, other secure sources of income and so were happy to take risks would I would be comfortable agreeing with this approach.

Pensions are becoming ever more flexible in terms of how you can take your benefits and independent financial advice is recommended for anyone looking to take control of their pensions and investments.

• Gregor Munro is a financial adviser at HBJ Gateley Wareing. If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail]. No responsibility for loss occasioned by any person acting, or refraining from acting, as a result of these answers can be accepted by HBJ Gateley Wareing or The Scotsman Publications Ltd. www.hbjgateleywareing.com