Do I take pension now or wait?

rodmac51

I'm 61 and have a small SIPP (about 20k) but plan to continue working for as long as I can (I'm self-employed). However, my present income is insuffient to make any further contributions into the SIPP and is unlikely to do so in the forseeable future. Therefore the pension pot will only grow (or shrink!) due to the investments performance. Assuming it grows slightly, I can't decide whether its better to buy an annuity now or later.

I figure that if I take it now as opposed to, say, 5 years time, I will get a lower annuity because I'm younger (ignoring current annuity rates) but it will provide an additional income for an extra 5 years. If I delay it for 5 years I will get a higher annuity (again ignoring annuity rates) but is that likely to make up for the income I would have lost over those 5 years?

I realise it will also depend on what happens to annuity rates but my guess is they are more likely to be lower in the future. I'm not trying to calculate the exact pension but wondered whether it's best to cash it in now or wait a few years?

I should perhaps add that apart from the state pension it is my only pension. Also, I will get an enhanced annuity due to ill health.

As I see it I've been saving for retirement but to convert those savings into income is a complete lottery depending on external factors that I have no control over (annuity rates).

Any advice would be appreciated.

dunstonh

I realise it will also depend on what happens to annuity rates but my guess is they are more likely to be lower in the future.

Do you think interest rates will be lower in future?

The current annuity rates appear to be higher than 6 months ago which was the current bottom in recent times. It could be that we have seen the bottom or it could be that there is further to go. No-one can tell.

srcandas

Rodmac with the help of the good folk here I've been looking into the timing issue. The factors of leaving it appear to me to be:

• the fund may go up or down (but more likely up).
• you'll get more because you're older
• annuity rates may go up or down but will be hit for men due to the equality thing at the end of the year.

The factors for taking it:

• You get a little each month but it will (most likely) be taxed if you are working.
• what can you do with a 25% lump sum?

I'm guessing that the latter one might be the deciding factor. If the answer is the lump doesn't matter I've concluded it is better to hang on if you hope to live for 23 years or more :cool:

But others will be along I'm sure. They're a good bunch when they post in plain english :rotfl:

BenefitU

This is a very personal issue so unable to advise.

Some may say with the prevalence of Enhanced Annuities, it would be advisable to smoke and drink for a few years and then look at enhanced annuity :eek:

rodmac51

Thanks for the comments.

With so many variables and 'what ifs' it's impossible to make a rational decision - it simply comes down to guesswork.

No wonder the majority just take the annuity offered by their provider!

mal4mac

It's always possible to make a rational decision, if you adopt an ultra-philosophical approach you can even reach certainty.

I would recommend reading "Seneca's letters". If you adopt a Stoic philosophy, then the state pension is obviously enough to live on. Therefore, it doesn't really matter what you do with your 20K. The certain, rational decision is to not care what you do - flip a coin.

Then again, perhaps that's too extreme...

If you are happy working, and are earning more than the state pension, then why not wait?

If you are not happy working, then work out when the annuity + savings will match the state pension - or a lower amount that you are sure you can live on. Then retire.

Given that shares can really plummet (remember 2008?) you might want to protect against a nasty loss - that 20K could easily be halved. Then again it could easily double!

Depends on what you want to do when you retire.

If you want to have some spare cash to buy paperbacks then maybe take less risk, if you would rather have expensive trips to Greek Islands or nothing, then take more risk...

If taking less risk, then one book I have suggests calculating your time to retirement and multiply by four - that's the percentage that should be in shares, the rest should be in something really safe (e.g. Government gilts) So that's 16% in shares and 84% in gilts.

If you invest in a gilt fund though, remember, that can go down, but 'probably' not as much as shares, given the nature of the investment and past experience...

If you want absolute certainty of maintaining, and slightly increasing, your 20K then investigate buying short-term gilts direct.

If you want absolute certainty & control over the amount in the pot, and the amount you receive, then the only answer is to take it now. To control the chance of inflation rising, and maintain real returns, you'll need to get an inflation-linked annuity.

It might be worth looking at income + annuity, and state pension + annuity, to see if they are less than the tax threshold... if so it may make it more attractive to 'go now'.

rodmac51

Thanks mal4mac.

That's a pretty in depth analysis! I'll consider all your points.

srcandas

Just wondering resident experts are there draw down schemes available for pots of £15000???

If so presumably Rodmac could take his 25% tax free and just leave the rest accumulating.

Just a thought as I have seen several schemes requiring a minimum of £50000.

:beer:

rodmac51

I think drawdown is only an option if you have a minimum income from other sources of £20000 pa.

Not an option in my case.

srcandas

rodmac51 wrote: »

I think drawdown is only an option if you have a minimum income from other sources of £20000 pa.

Not an option in my case.

I believe that is only a requirement for flexible draw down, not capped draw down. But the problem might be the minimum fund requirement. I see now that it is often suggested (as opposed to a rule) as £100000 but I guess new products get launched from time to time.