Consider The Options Before Taking Your Pension

When you were a young­ster do you remember chuckling at the silly antics of Freddie and the Dreamers, or sing­ing along to Herman’s Hermits? If so, you’re probably now of an age when you’re thinking about your pension and when you might be retiring, if indeed you haven’t done so already.

The greater proportion of my clients are in that age group. For a few, life hasn’t quite worked out as planned. From a financial point of view, life was supposed to get easier as the kids flew the nest and the mortgage got paid off. Sadly, many people are finding that is not always the case.

More frequently these days I find that a pension fund is being called upon ear­lier than expected to help overcome some of life’s financial challenges. This can be for all sorts of reasons, perhaps redundancy, or to pay university costs for children, or because business isn’t as good as it was.

Pension rules allow for pension bene­fits to be paid out from age 55 onwards. Some financial advice firms actively promote their ‘Pension Unlocking’ serv­ices and while this is fully legitimate, the regulators keep a very watchful eye on this to make sure that people are not badly advised and deprived of their pen­sion in later years, without realising the consequences. Of course this is a good thing as it helps to protect the public against the risk of mis-selling. An ad­viser would be expected to explore all appropriate avenues, including the pos­sibility of getting a loan instead of using the pension fund. Thankfully, the due process goes a long way to make sure that advisers give high quality advice – if they don’t, they face a real possibility of the Regulators coming down very hard.

One of the benefits of a pension fund is that part may be taken as a cash lump sum, free of tax. Generally, this is limit­ed to 25 per cent of the available pension pot. It is the cash lump sum that is usu­ally of most interest when money is tight. The rules allow this to be accessed from age 55 and the pension can be taken at the same time, or it can be deferred to a later date. If the money is being used for the right reasons and the person is fully aware of the consequences, earlier ac­cess to a pension may well be the right action. Sometimes a large cash lump sum can make a big difference to a per­son’s personal circumstances and can solve immediate problems – perhaps al­most a life changing thing.

Even when money from the pension fund is not necessarily required imme­diately, there may be other good reasons to start taking the pension, perhaps sooner rather than later. Within Torquil Clark we believe that as a general prin­ciple, there is a time to build up a pen­sion fund and there comes a time to start taking the pension, although of course there may be exceptions. Often, it can make sense to start looking at your op­tions from about age 60 onwards, simply because you need to receive the pension for many years to get your money’s worth out of it. I need to qualify this by saying that this can depend on whether there are penalties or actuarial reductions for taking the pension early.

For those expecting pensions from final salary type schemes, the decision making is somewhat less difficult as you should know what to expect and when it will be coming, more or less. However for those in money purchase type pensions, such as Stakeholder, Personal Pensions and SIPPs there are many variable fac­tors to consider, such as the fund value and interest rates, especially at a time when both are at lower levels, thereby having an impact on the level of pen­sion.

Deferring the pension could prove costly. For example, if a 65 year old waits for a year to start taking his pension, he could be almost 80 by the time he catch­es up with that one year’s pension lost. This is based on reasonable assump­tions about investment growth and in­terest rates during that year.

People will sometimes defer in the hope of the fund value improving, or perhaps pension annuity rates getting higher. There is a risk that these could go in the opposite direction which means lower pension benefits in addition to missing the pension from earlier years. This general principle should be taken on board by almost anyone over age 60.

Remember, each individual’s circum­stances are different, so please always try to take good, reliable, advice about your pension.