Question
I've got three modest pension plans that are due to mature at the end of June. As my husband is still working and hopes to do so for another three years, my dilemma is whether to transfer the matured pensions into my SIPP (into which I intend to continue paying anyway) and hope that they'll carry on growing for a few years more, or to take an annuity income now and invest that. Even the best rates currently on offer don't seem to pay much more for someone aged 70 than they do for someone aged 65, suggesting that there's not a lot of point delaying the annuity - unless of course the funds are worth substantially more by the time I take the pension.
My inclination is to take the 25% tax-free lump sum and then purchase the best available annuity with the rest. I suppose it all depends on what happens to annuity rates over the next few years and on which way the stock markets head. I know you don't have a crystal ball so can't predict such movements, but what would you do?
And are there any other factors I should take into account?Answer
This is a great question as it’s a dilemma encountered by a lot of people. And you’re right, there is no simple answer, your decision will need to be based on a guesstimate of what will happen in future.
The bottom line is whether a higher pension fund value and/or annuity rate at the delayed retirement date will more than compensate for the pension income you could have received meanwhile. I’ll ignore your tax position in my answer, but bear in mind that if you’re still working and a taxpayer then you may wish to defer taking pension income if you’ll fall into a lower tax band when you retire.
Annuity rates are lower than they have been for some years – they’ve typically fallen by around 10% over the last two years. This is due to relatively low gilt yields and, to a lesser extent, increased life expectancy.
Insurers buy gilts to provide annuity income, so when gilt yields (i.e. gilt income / gilt price) fall annuity rates tend to follow. Gilt yields, in turn, are mainly influenced by interest rates and inflation. Rising interest rates and/or inflation usually mean higher gilt yields (hence better annuity rates) and vice versa.
Interest rates are currently low and likely to stay that way for a while yet. Inflation has recently started to rise and economists are divided on whether it will remain around current levels or fall back again. My guess is that inflation will fall later this year and then remain low next year, along with interest rates. If I’m right then annuity rates are unlikely to change much over the next couple of years, although I think it’s likely we’ll see them rise within the next five years.
You’d expect annuity rates to rise in any case as you get older because your life expectancy is shorter, but they may not rise by as much as you’d expect due to ‘mortality drag’ – you can read more about this on our annuities page.
If you remain invested then how will your pension fund perform? If you plan to buy an annuity within the next five years then it makes sense to adopt a very cautious investment strategy (particularly given the current climate), i.e. reduce stockmarket exposure in favour of less volatile assets. This will naturally limit upside (and downside too!) so you probably can’t rely on investment returns to make a significant difference to your future pension income.
Before making your decision I suggest trying out a few scenarios on our Retirement Delay Calculator to get a feel for how different annuity rates and investment returns might affect your overall retirement income.
I ran a few examples for a female assuming a 6% annual investment return and using current annuity rates to find the approximate breakeven point (i.e. when the total pension benefits received are equal) when delaying annuity purchase versus taking it at age 65, as follows:
If annuity rates improve and your fund grows by more than 6% a year then expect the breakeven age to reduce and vice versa.
Taking all this into account, I would personally be inclined to buy an annuitiy this year after taking the tax-free lump sum. But bear in mind that I’m quite cautious about markets and the economy at present; if you’re more optimistic (and the markets/economy do well) then delaying could leave you better off overall thanks to investment performance and rising annuity rates.
If you do delay then check whether transferring the pensions into your Sipp is cost effective. If the existing pensions offer suitable funds at a lower cost than the Sipp then staying put might be worthwhile.
Whenever you do decide to buy an annuity, remember to shop around for the best rate and buy through a discount broker to enjoy commission rebates (usually worth up to 1% of the annuity purchase price).
I've got three modest pension plans that are due to mature at the end of June. As my husband is still working and hopes to do so for another three years, my dilemma is whether to transfer the matured pensions into my SIPP (into which I intend to continue paying anyway) and hope that they'll carry on growing for a few years more, or to take an annuity income now and invest that. Even the best rates currently on offer don't seem to pay much more for someone aged 70 than they do for someone aged 65, suggesting that there's not a lot of point delaying the annuity - unless of course the funds are worth substantially more by the time I take the pension.
My inclination is to take the 25% tax-free lump sum and then purchase the best available annuity with the rest. I suppose it all depends on what happens to annuity rates over the next few years and on which way the stock markets head. I know you don't have a crystal ball so can't predict such movements, but what would you do?
And are there any other factors I should take into account?Answer
This is a great question as it’s a dilemma encountered by a lot of people. And you’re right, there is no simple answer, your decision will need to be based on a guesstimate of what will happen in future.
The bottom line is whether a higher pension fund value and/or annuity rate at the delayed retirement date will more than compensate for the pension income you could have received meanwhile. I’ll ignore your tax position in my answer, but bear in mind that if you’re still working and a taxpayer then you may wish to defer taking pension income if you’ll fall into a lower tax band when you retire.
Annuity rates are lower than they have been for some years – they’ve typically fallen by around 10% over the last two years. This is due to relatively low gilt yields and, to a lesser extent, increased life expectancy.
Insurers buy gilts to provide annuity income, so when gilt yields (i.e. gilt income / gilt price) fall annuity rates tend to follow. Gilt yields, in turn, are mainly influenced by interest rates and inflation. Rising interest rates and/or inflation usually mean higher gilt yields (hence better annuity rates) and vice versa.
Interest rates are currently low and likely to stay that way for a while yet. Inflation has recently started to rise and economists are divided on whether it will remain around current levels or fall back again. My guess is that inflation will fall later this year and then remain low next year, along with interest rates. If I’m right then annuity rates are unlikely to change much over the next couple of years, although I think it’s likely we’ll see them rise within the next five years.
You’d expect annuity rates to rise in any case as you get older because your life expectancy is shorter, but they may not rise by as much as you’d expect due to ‘mortality drag’ – you can read more about this on our annuities page.
If you remain invested then how will your pension fund perform? If you plan to buy an annuity within the next five years then it makes sense to adopt a very cautious investment strategy (particularly given the current climate), i.e. reduce stockmarket exposure in favour of less volatile assets. This will naturally limit upside (and downside too!) so you probably can’t rely on investment returns to make a significant difference to your future pension income.
Before making your decision I suggest trying out a few scenarios on our Retirement Delay Calculator to get a feel for how different annuity rates and investment returns might affect your overall retirement income.
I ran a few examples for a female assuming a 6% annual investment return and using current annuity rates to find the approximate breakeven point (i.e. when the total pension benefits received are equal) when delaying annuity purchase versus taking it at age 65, as follows:
| Age pension taken | Estimated breakeven age versus taking pension at 65 |
|---|---|
| 67 | 81 |
| 70 | 82 |
| 75 | 85 |
If annuity rates improve and your fund grows by more than 6% a year then expect the breakeven age to reduce and vice versa.
Taking all this into account, I would personally be inclined to buy an annuitiy this year after taking the tax-free lump sum. But bear in mind that I’m quite cautious about markets and the economy at present; if you’re more optimistic (and the markets/economy do well) then delaying could leave you better off overall thanks to investment performance and rising annuity rates.
If you do delay then check whether transferring the pensions into your Sipp is cost effective. If the existing pensions offer suitable funds at a lower cost than the Sipp then staying put might be worthwhile.
Whenever you do decide to buy an annuity, remember to shop around for the best rate and buy through a discount broker to enjoy commission rebates (usually worth up to 1% of the annuity purchase price).
Read this Q and A at http://www.candidmoney.com/questions/question185.aspx
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