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Up to now the earliest you can start taking your private pension is at the age of 50. But because we’re all growing older and poorer, the rules are about to change and from the start of the new financial year on April 6, the earliest anyone can start drawing their pension will be 55.
Now there’s not many of us in the lucky position of being able to retire early – whether at 50 or 55. But for those of us lucky enough to have that option, this change in the rules raises some tough decisions. Yes, there are a few of us who are rich enough to opt out of the rat race at 50 and who will be alarmed at having to work for another five years before being able to get hold of their pension cash.
But there are many more of us who are in the less fortunate position of having seen the value of our pensions plummet and, more recently, watched them recover somewhat thanks to the stockmarket rebound of the past nine months, which places many more of us in a quandary
Take it, or leave it?
What’s more, with the aftermath of the longest recession we’ve ever known, there are serious doubts about how soon we can expect any meaningful economic recovery. So the question many pre-retirees are asking themselves is: “Should I take my pension now, or work another five years and possibly see the value of my pension further eroded over that time?”
That’s not an easy question to answer. But the chances are those deciding to hold off taking retirement and their pensions now, will be better off than those choosing to retire now. Here’s why:
The stockmarket’s bumpy ride
The natural volatility of the stockmarket can provide a tempting reason for those with their pension funds tied into it to feel like opting out – either when it has gone through one of its occasional slumps, or when it is riding high.
There is a natural desire to get our money out of an investment that isn’t performing, because we don’t want to risk losing even more than we already have. Likewise, there is an equally strong wish to get out when the market is riding high as we perceive we would be better off taking or money now rather than waiting for the inevitable fall.
Many of us approaching retirement last April must have been tempted to get out when the FTSE had collapsed to just 3,500 points.
Despite the ongoing recession, however, the FTSE has roared back by 30% in a mere nine months since last March’s 3,500-point low – something that few people would have thought remotely possible.
But the biggest and most reliable factor to consider is that by delaying taking your pension out for a further five years, gives you not only five extra years’ worth of hoped-for growth, but crucially means you can expect a much more substantial annuity. The reason for this is obvious: you will be claiming for five years less than you would have done – no matter how long you live for.
Of course, just how much you get, will depend on how much you have put in – plus whatever growth your pot of money sees over the course of its investment.
How waiting five years could help
But to get an idea of how big the difference might be, the following typical scenario will show how much extra you could get by delaying your retirement from 50 to 55.
This scenario assumes you are a 50-year-old non-smoking man with a pension pot of £50,000. It looks at how much extra you could expect to receive if you waited until you were 55, either paying in an extra £100 a month over that time, or not making any further contributions. It also assumes an annual growth rate of 7% a year and that you don’t take out a cash lump sum on retirement but instead use the whole lot to buy an annuity.
Example
Age: 50
Further contributions - Zero
Pension value at 55 - £50,000
Annual pension - £2,792
Total payout at 80 - £83,760
Age 55:
Further contributions - Zero
Pension value at 55 - £60,708
Annual pension - £3,618
Total payout at 80 - £90,450
Age: 55
Further contributions - £100 per month
Pension value at 55 - £68,562
Annual pension - £4,087
Total payout at 80 - £102,175
So, opt out at 50 and your pension pot will only provide you with an annual income of £2,792. Wait just another five years though and you’ll be getting £3,618 a year. That might not sound like much but it’s a whopping 30% increase. Sure, you have to factor in that you won’t be getting the £2,792 a year for five years, but if you live to the average age of about 80, you will still be getting a much bigger total payout.
The power of compounding
But the real advantage of waiting the extra five years is that it gives you the chance to make those extra contributions. Even by adding a very modest £100 a month we can see that the total value of your pot could have leapt to more than £102,000 and bring you in annual income of over £4,000.
Sure, the above scenario might not seem all that generous, regardless of whether you retire at 50 or 55. But most people’s pension pots should be substantially bigger than this and so the rewards could be that much greater.
But the key point to note is that – putting the variability of the economy and stockmarket aside - the longer you leave your pension untouched, the far better off you would hope to be in the long run.
