I hope this is one article that produces some comment from independent financial advisers. I do wonder if I am taking too simplistic an approach, but I have come to the conclusion that with personal pensions you should take the money as soon as possible.
I should point out that this is a personal view. This is not investment advice and we are not regulated under the FSA to give specific investment advice.
I have been looking at the current annuity rates – the amount that pensions actually pay you. The earliest date you can take your pension is aged 55.
A male with a fund worth around £100,000 at age 55 would receive a pension of around £5,352 a year for the rest of his life. If he lives to 85, the total paid out would be £160,560 gross. The pension is subject to tax. So the actual amount paid would be less than this amount.
If he waits until age 65 before taking the pension, the pension paid would be around £6,274 a year. Again, with a life expectancy of 85, the amount paid out would be £125,480 gross. Again, the pension is subject to tax.
By taking the fund at age 55 rather than waiting until age 65, the amount actually paid out is £35,080 more. Even if you lived to be 100, you would still benefit by taking your pension sooner rather than later.
In either case the pension saver can take 25% of their fund as an initial lump sum free of tax, but the pensions paid would reduce by 25%. There would be a significant tax saving by taking the cash lump sum.
My numbers make no allowance for the tax rate when you take your pension at 55 or at 65. They also do not allow for any potential growth in the value of a pension fund between the ages of 55 and 65, but this may be quite small.
The reasoning is that some IFAs would suggest that your pension pot is moved into less risky funds (say, fixed interest) in the years before retirement. These funds protect the growth already achieved.
My reasoning behind my article is that we do not know how long we are going to live. In many cases when you die, your pension fund dies with you.
If you take the pension at age 55 from a fund of £100,000 taking the maximum tax-free lump sum of £25,000 and a pension of £4,014 you would need to live for at least 18 years to get your own money back and that is before any tax is deducted.
Personally, unless someone convinces me otherwise, I will be taking my pension at 55 on the basis that money now is better than money later. The cash lump sum would also be useful to pay off the balance of my mortgage!