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Take your pension as early as you can

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!

13 Responses to “Take your pension as early as you can”

  1. Deborah Toulson says:

    I have thought this all along and although I have another 8 years before my teachers pension is due, it is exactly what I intend to do. My husband, who is also a teacher, has just started taking his at 55 and we calculated he is much better off doing this now rather than waiting. By doing this we can both start our semi-retirement earlier and enjoy it whilst we are still in good health.

  2. Well Andrew,

    That is certainly thought provoking and from what I can see I cannot fault your logic – questions is – why am I at age 63 still putting a little away to a Pension Fund? – I need to talk to my IFA pretty quickly it seems. in any event I reckon I will be working , even if only part time, due to the previous collapse of Equitable Life and indeed funds with other large providers – c’est la vie – or not as the case may be!!

  3. Tony Armstrong says:

    Andrew, a thought provoking issue and one that many would benefit from considering. The other aspect that really needs to be considered alongside the issues you raise is the personal tax situation of the individual. If the individual is a higher rate tax payer with surplus cash each month then the tax relief from increased pension contributions provide a valuable offset to the meagre investment returns available at present (not to mention inflation).

  4. Tony Quinn says:

    Sound advice Andrew and I did so six months ago for the same logic that you expounded. I was lucky in that my ‘pot’ was assessed before the market crashed and will not be reviewed again for 5 years when hopefully the market may have recovered somewhat. Even if it hasn’t, the lump sum was a boost and I will have 10 years income as well as any earnings ahead of my government pension when I am 65!

  5. Andy Pulford says:

    It’s a fair point but even allowing for poor investment performance in recent years we ought to factor in some growth between 55 and 65 so the annuity purchase price will not be the same. A growth rate of 3% pa would produce a pension fund of £134391 and using the same annuity rate at 65 would produce an income of £8,431. Deferring the annuity purchase could also give access to enhanced annuity rates down the line if there was a decline in health. Now there are no hard and fast rules in financial planning other than everyone is different. What might suit one does not necessarily suit all and some may as you say benefit from an early retirement strategy. Andy Pulford – Stephen Spires Financial Consultants

  6. Bob Doney says:

    ….. on the other hand, annuity are at rock bottom at present. That may not continue. If you believe that we will enter a period of hyperinflation in the next few years, it makes sense to hang in there, and transfer your funds to appropriately risky equities: mines, raw materials and food production spring to mind. If you take your pension now, your four grand a year may just be enough to buy one week’s shopping at Aldi. Happy days!

  7. Bob Doney says:

    annuity RATES … sorry

  8. Andrew Scott says:

    Many thanks to Deborah, Arnold,Tony,Andy and Bob for your excellent comments. I think everyone needs to take an active role in managing their pension investment. Personally I think the vast majority of people, including me are too passive when it comes to pension planning.

  9. Jon says:

    These are similar to thoughts I’ve had. With the prospect of having to work until I’m 67 to then still attain a modest income from state and work pensions of which I’m on my third pension. I reckon that from my calculations I should at least start obtaining income pension from one of my earlier work pensions which is just lying static. This would in turn free me up to work part time whist keeping my contributions the same to the scheme I’m in now with the job I’ve got. I can enjoy the extra days I don’t work whilst maintaining reasonable health.

    • Andrew Scott says:

      Hi Jon

      Thank you for your post I do think you should take some advice from a qualified IFA. you no longer need to take an annuity, you can take a flexible drawdown instead. This was not an option when I drafter this article over five years

  10. Tommy says:

    Hi Andrew

    just came across your excellent article,appreciate it is from 2011.I am in potentially slightly different ( but ultimately same lol!)scenario I have the opportunity of receiving my local government pension having turned 55 and reducing my working week, have tried doing the maths ( ultimately I will need to speak to an IFA – never have done or had one since started working at 16 !! I am of a mind to go for it slightly smaller yearly amount but ultimately I am receiving it early and with a lump sum. Any info ( from anyone much appreciated)

  11. Tommy says:

    Apologies just notice I kept using the word “ultimately” a lot !!

    I am ultimately going to have to make my mind up

  12. Andrew Scott says:

    Thanks for your posts Tommy

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