If the UK’s stormy political scene is complicating a decision about what to do with your pension savings, you’re not alone. The Brexit delay is fuelling uncertainty about the economy, which in turn is making it hard for some retirees to know what’s right for them. This was highlighted on the popular ‘This is Money’ website recently.
Pensions expert (and former Pensions Minister) Steve Webb responded to this question from a user of the site:
“I have a personal pension which I have not yet taken. I am taking my state, military and another personal pension. Would it be better to take the other pension sooner rather than later due to all the political upheaval? I will be 68 in September.”
After clarifying that he couldn’t give personalised advice, Steve expressed a view that might apply to others in a similar situation:
“The very fact that you are asking the question suggests to me that you are rather uncomfortable with uncertainty.
“If I am right, then there would be nothing wrong with you using your personal pension to buy an annuity – and then having a secure income for the rest of your life.”
Steve picked up on the main reason that many people choose an annuity rather than an investment-linked alternative. With an annuity, your level of income is guaranteed for the rest of your life, unaffected by the ups and down of the stock market.
It is important to understand that leaving pension savings invested with a view to taking out an annuity later on could incur a ‘cost of delay’. Let’s explain…
You may decide to leave your pension pot where it is for a few months or longer, without taking an income from it. That could be because you hope the value of your pension fund will rise.
You might also wish to delay turning your pension pot into an annuity in the hope of getting a better annuity rate (and therefore income) once political uncertainty has passed.
Let’s say both these things happen and the monthly income you can get from an annuity is indeed higher in a few months or years. So far so good – but remember that in the intervening period you will have received no income from your pension pot.
Even if your pension pot grows, and annuity rates increase, there is no guarantee this would make up for the income lost by delaying your annuity.
None of us know how long the uncertainty will continue. In fact, at the time of writing, Sky Bet will give you odds at just 9/4 that Brexit won’t happen before 2022 – so clearly the bookmakers are not convinced that withdrawal will happen soon.
Also, there is no guarantee that a resolution of Brexit uncertainty will lead to an individual’s pension fund value increasing, or annuity rates escalating. It is possible, of course, but nobody has a crystal ball or some other means to predict such matters with certainty.
We would suggest that a starting point in the decision-making process would be to obtain up-to-date quotations, shopping around to find the highest income. You should also find out if you qualify for an enhanced annuity on account of health issues or lifestyle factors such as smoking.
These are both services that Retirement Line carries out for our clients. We can give you an accurate view of the level of guaranteed annuity income that your pension fund could generate. That might be a good benchmark against which to compare alternative options.
Important: the information in this article and elsewhere on this website is not advice. Please make sure you consider all your options when deciding what to do with your pension savings, taking personal financial advice if necessary.