Should I take my Pension Now with Inflation Soaring

michaeldowney

Hi, I have just turned 65 and have got a pot of £48000 on which I have been offered an annuity of £3900. I am in good health but am looking at the inflation rate that could hit double figures at the end of the year. Is it worthwhile taking this annuity or taking 25% of the pot now and leaving the rest invested for drawdown at a later date. I do not need the money at the moment.  What do you think?

dunstonh

I have just turned 65 and have got a pot of £48000 on which I have been offered an annuity of £3900.

That is a good annuity rate.   Is must be a guaranteed annuity rate.  Is that level or with indexation?

 Is it worthwhile taking this annuity or taking 25% of the pot now and leaving the rest invested for drawdown at a later date.

No.   You say don't need the money so there is little point in accessing it.  Especially if the GAR gets better as you get older.

michaeldowney

Hi dunstonh, it is a GAR rate but unfortunately it is not index linked. I was just thinking back to the 70's and 80's when interest rates were 17% and inflation reached 24%.  If we return to those times then my pension would become pretty worthless very quickly whereas if I invested the lump sum and interest rates increased at the rate they are at the moment I would at least have some hedge against inflation and still have the lump sum available for a later date. What do you think?

Linton

That annuity rate of 8% is very good and well above commercial rates. I would assume that it is not index linked but if it is the value would be astounding.  At that % the immediate thought is that you would be foolish to turn down such generosity, since you would get the value in £s back in well under average life expectancy.  You could simply reinvest all the income in an S&S ISA.

However your circumstances may lead you to taking the money, but I think you need a good justification.

You should check the Ts&Cs.  Dunstonh suggests the GAR may get better if you simply delay taking the pension which could be the best option.  However the conditions for my GAR were very tight.  It only applied if it was taken at 65 and there was little scope to change the terms - for example I could not include my wife.

Albermarle

michaeldowney said:

Hi dunstonh, it is a GAR rate but unfortunately it is not index linked. I was just thinking back to the 70's and 80's when interest rates were 17% and inflation reached 24%.  If we return to those times then my pension would become pretty worthless very quickly whereas if I invested the lump sum and interest rates increased at the rate they are at the moment I would at least have some hedge against inflation and still have the lump sum available for a later date. What do you think?

If you leave your pension invested, it may go up in value or it may go down over the short and medium term. Currently most pension pots are around 10% down so far this year . If you combine that with 7% inflation , they are down 17% in real terms.
Hopefully in the long term ( >10 years ) there will be some recovery/growth but it is not guaranteed. 
You mention interest rates but these are only very loosely/indirectly related to investment performance, and rising rates can have a negative effect.

Thrugelmir

michaeldowney said:

whereas if I invested the lump sum and interest rates increased at the rate they are at the moment I would at least have some hedge against inflation and still have the lump sum available for a later date. What do you think?

There's no guarantee that your investments will hedge inflation. Potentially could be the inverse relationship. 

michaeldowney

My thanks to everyone who contributed to this post.  I will take your general advice and stick with my pension and you are quite right Linton the GAR is dependent on it being just me and I must get an annuity within a very short period after turning 65. Have a good weekend all. M