Top Ten Tips: Choose your retirement age

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IT WAS confirmed in the Queen’s speech this week that the state pension age will rise to 67 between 2026 and 2028, with future increases linked to life expectancy.

Thousands of Scots will face longer working lives as a result, but you can still determine your own retirement age with some smart pension planning. Doug Blanchard, a financial planner at Acumen Financial Planning in Edinburgh, offers his top tips on taking charge of your retirement finances.


Growing deficits in public and private sector pension schemes, the never-ending closure of generous pension arrangements, changes to tax breaks and the continual squeeze on state pension provision all serve to reinforce the message that the onus is increasingly on us, as individuals, to fund our own retirement. Assess your current position and crunch the numbers to see how much more you have to save to achieve your retirement goals.


Make sure you use every ounce of tax efficiency possible. Pensions are among the most tax-efficient forms of investment, but don’t forget to use other tax breaks, such as your individual savings account (Isa) allowance (£11,520 in 2013-14, half of which can go into a cash Isa). Some final salary schemes allow members to buy “added years” to increase their scheme benefits. This is often a sensible step, though there are circumstances where it might not be the best option. Make sure you understand how much it will cost, the added benefits you’ll receive in return and how this compares with other investment options.


Converting your defined contribution pension savings into an income for life by buying an annuity? Shop around and exercise your right to the “open market option” (OMO), rather than accept the deal offered by your pension provider. The OMO allows you to scour the market of annuity providers to net the highest level of income available. The difference between the best value annuities and the worst is significant, so don’t take the first deal you’re offered.


Annuities come with lots of options. You can tailor yours to include benefits such as an increasing level of income, a guaranteed payment period in the event of death and a pension for your spouse or partner if you die. Think carefully about which of these you really need. The more options you add, the more expensive the annuity contract will be, meaning the initial level of income will be lower.


If you’ve been diagnosed with an illness or have other health problems that could reduce life expectancy, such as high blood pressure, you may be able to get a higher retirement income via an enhanced annuity. In some cases, this can be up to 40 per cent more.


You might also be able to get a higher monthly retirement income if you are overweight or if you smoke. Some providers also offer higher rates to people who worked in certain jobs, such as those involving manual labour, or who live in particular areas of the country.


Annuity rates have suffered amid government moves to reflate the economy with quantitative easing. Once you’ve taken out an annuity you can’t change your mind. An alternative to a lifetime annuity is a fixed-term annuity, which provides a regular income for a number of years as well as a maturity amount at the end of the specified period. You can then use this to invest in another retirement product, such as another fixed-term annuity, a lifetime annuity or income drawdown.


One notch up in terms of risk from fixed-term annuities is investment-linked annuities. Your pension income varies to reflect changes in the value of investments, such as stocks and shares. This means you can benefit from stock market growth, but the value of your income could fall as well. Most investment-linked annuities limit this risk with the provision of a guaranteed minimum income.


Income drawdown allows you to unlock tax-free cash from your pension savings while staying invested, enabling you to retain ownership and control of the funds and benefit from investment growth. Drawdown limits have just reverted back to 120 per cent of the income from an equivalent annuity – making it a more attractive option – but remember that as well as control you also retain all of the investment risk.


Whether you’re still working and are seeking to boost your retirement savings or are approaching retirement and need to ascertain the best option for you, enlist professional help to ensure no stone is left unturned in paving the path to a better retirement financially.