When I'm 64 … or possibly 68

Published on Friday 17 April 2009 20:01

DEVASTATED by shrinking pension pots, falling house prices and rock-bottom cash returns many people nearing the end of their working lives are being forced to consider delaying their retirement.

Worst affected are workers with defined contribution (DC) and private pensions who have remained exposed to stock markets despite their imminent retirement. The average DC pension has lost around a third of its value since the credit crunch began 18 months ago, estimates Aon Consulting. Allied to the growing pressure on household finances amid plunging house prices and rising unemployment, that is why more than two million workers in the UK are delaying their retirement this year alone, according to Prudential.

But hanging on until pension fund values improve is fraught with risk, warned Gordon Wilson, managing director of IFA Thomson Shepherd. "Your age, health, fund performance and annuity rates all affect your ultimate pension income and with the exception of your age, none are fixed or predictable. It is too important and there are too many moving parts to be taking chances," Wilson explained.

How to survive in the meantime is probably the key question in retirement deferral, said Wilson. "Start by asking yourself how much income you need (or want) to live on in retirement," he suggested. "If current fund values and annuity rates are adequate to support you in retirement now, then why delay and take the risk that your target income cannot be achieved in future?"

However, if your pension provision is inadequate then there may be little choice but to defer or carry out some form of personal financial restructuring, Wilson added. "The debate then is around how much or how little risk you need to take to achieve your goals and how much more money you need to save before you can afford to retire," he said.

For many people seeking to defer retirement, the simplest way to bridge the funding gap is to continue working. But laws introduced in 2006 to combat age discrimination in the workplace have enjoyed mixed success, with many companies continuing to enforce the default retirement age to prevent workers from extending employment.

If working beyond your retirement age is either impossible or unpalatable, your assets may offer a solution. While house prices have fallen over the last year, cash can still be unlocked from property through equity release plans, although this must only be considered with specialist advice. Similarly, evaluate your other assets, including savings and investments, to work out if they can provide the income needed.

An increasingly popular solution for workers reluctant to draw their whole pension is to retire in stages. From the age of 50 (rising to 55 next April) investors can take up to 25 per cent of their pension tax-free and leave the rest invested in the hope that it will benefit from a market recovery. Laith Khalaf, pensions analyst at Hargreaves Lansdown, commented: "You can phase your retirement by living off the tax-free cash and leaving the rest of the fund where it is. But this is only for investors with a pension pot of at least 100,000 and where it suits your attitude to risk."

If you do this, review your pension investments to ensure they continue to reflect your attitude to risk and circumstances. And if you have delayed retirement to wait for your investments to recover, you will also need to factor in a realistic recovery time, warned Khalaf. "If you are thinking about asset recovery you need to look at how long you can afford to leave it because we may not see a recovery in the next 12 months," he explained. "You have to give it long enough and that could be three to five years."

Alternatively, Khalaf suggested that, for some retirees, deferring their state pension could be preferable to delaying their private or occupational pension. "This way you can increase the amount of state pension you can draw down in the future because you can get a 10.4 per cent increase in your state pension if you leave it for 12 months, and it is guaranteed," he explained. (See box for more).

However deferring retirement does mean flirting with fluctuating annuity prices, at six-year highs last summer but now spiralling downwards. So while you may be giving pension funds time to recover, some of the gain could be wiped out by the lower income paid by an annuity bought further down the line.

"People are hanging on in the hope that their pension fund will recover but there is potentially an offset as annuity rates are down and could decline further," said Khalaf.

Of course, delaying retirement is not for everyone. In which case there are ways to boost the income you can get from your pension fund. For example, using the "open market option" to shop around for the best annuity deal can make a huge difference to your annual retirement income. Similarly, smokers and those in ill health take an enhanced annuity.