The number of people taking company pensions or a personal pension rose steeply in January, as the deadline approaches for changes in the minimum retirement age on April 6th.
New data from pensions specialist Aon Consulting showed the number of those retiring and taking their pension in January was up 22 per cent compared with September.
Aon believes the rise is driven by a rush of people wishing to take their company pensions and personal pensions before the minimum retirement age goes up from 50 to 55 on 6th April.
After that date, a person aged 50 would have to wait for 5 years for their tax-free lump sum of 25% of their company pension or personal pension, and use the remainder to purchase a pensions annuity, or set up another income arrangement.
Other employees who may wish to retire now include those aged under 55 who believe they may be made redundant, and wish to avoid having to wait several years for their pension.
Annuities may fall by 30%
Another reason to take your company pension or personal pension now is the possibility that pension annuity rates may fall by 20-30%, due to new European pensions legislation coming in 2012.
The Brussels initiative ‘Solvency II’ requires pensions and annuity providers to hold back more capital in their reserves, specifically to meet their annuity pay-out liabilities, which is likely to mean reduced payments to annuity holders.
Consulting a financial adviser to look urgently at purchasing a pensions annuity, before rates undergo this radical fall, is essential.
Income Drawdown
Nonetheless, the purchase of an annuity does not become compulsory until the age of 75, and retirees who believe that stock markets are now in recovery from the recent downturn may prefer an unsecured pension, also known as income drawdown, where their pension pot is left invested in the stock markets for longer. This is a more risky strategy than purchasing an annuity right away.
With income drawdown, your income is taxed on a PAYE basis. You can take or ‘draw down’ larger amounts from your pension savings, compared to what you would have had from an annuity payment. You can also choose to take lesser amounts, or none at all from time to time, making income drawdown a good option for those who are continuing to work part-time.
With income drawdown, your pension remains your money, and can be left to your family if you die, whereas if you had bought an annuity your money would become the property of the insurance company.
The downside is that, with income drawdown, you are ‘dipping into’ your pension pot. This means that, if you draw down more than the yield from your investments in any given year, you are eating into the capital in your fund, and depleting your retirement savings.
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