27 September 2012

Should I ... Consolidate my Pensions?

It's easy to end up with half a dozen different pension plans over the course of a working life. Is it worth consolidating them? Here are some reasons for and against...
 
For ...
  • Some pensions have better investment options than others - consolidating could take advantage of those (this is probably the biggest reason to consolidate in my view)
  • Charges levied by pension plans are important - consolidating could mean getting rid of the higher charging plans (typically the older ones)
  • Your admin is easier if you don't have to deal with so many pension plan providers (for example, changes of address and dealing with the annual paperwork)
  • It's also easier to turn your pension into an income at retirement if you have fewer plans to deal with
 
Against ...
  • If you have any Defined Benefit ("final salary") pensions, then it is rarely worth moving those into a Defined Contribution ("money purchase") plan since you would be taking on the investment risk instead of the pension scheme
  • Some types of Defined Contribution plan have additional benefits which you would lose if you move that pension money elsewhere; that could include a guaranteed annuity rate (which will almost certainly be higher than you would get on the open market), or a higher than normal tax free lump sum entitlement (25% is the normal maximum)
  • If your pension is invested in a With Profits fund, then there may be a Market Value Reduction applied
  • You have to do some work here and now to achieve it!
     
 

17 September 2012

Should I ... Defer taking my pension (or State Pension)

There is an updated version of this blog published in September 2017 and taking into account State Pension changes implemented in April 2016. See "Should I Defer Taking my State Pension".

As I've noted in other blogs, if you take an income from a pension plan at the moment - typically via an annuity - it won't be on favourable terms. So the natural thing to do is to wait a bit in the hope that things will improve. But is that the sensible option?
If you have a following wind, then your pension investments will grow well in the meantime, and annuity rates will go back up again and give you a higher income than if you took an income now. Also you would be older, which gives you a higher annuity rate, and you may not be so healthy (sorry to point that out) and may be entitled to an enhanced annuity as a result.
But... You would have missed out on X years of income.
Also, annuity rates for older people are not as high as you might expect, since life expectancy actually increases the older you get - life expectancy for a 65-year old male is 86, but for a 70-year old is 87.
The first point is the key one, though. If you add up the total income received year by year, then my calculations indicate that if you defer taking an income, it might take something between 15 and 25 years before you catch up with the income you would have received (depending on your age, and on assumptions about investments over that time period). How many years will you be around after that point to benefit from the higher income? Your guess is better than mine.
In summary, the only situation that makes it clearly better to defer is if investment performance of your pension is going to be good (perhaps better than 7% or 8% per year), and annuity rates return to historic levels within 5-10 years (which might just happen - who knows). If you think any of that unlikely, then don't defer but go for it sooner! ... but do think about income tax in the meantime - you don't want the extra income to push you into higher rate tax, for example - and you also need to be aware that the death benefits available to your family are likely to be better if you do defer and then die before taking a pension.
What about your State Pension? You can defer taking this beyond your State Pension Age and get a small increase in return. But should you? The same point applies - you are losing income in the meantime, and are pretty unlikely to catch up within a reasonable time. For most people, deferring State Pension doesn't make sense.

12 September 2012

Should I ... Have Life Insurance?

Any sort of insurance is there to protect something. So the question is, What have you got which needs protecting? Or to put it another way, what could happen which will disadvantage you or someone else?
 
Here's some examples:
- You're the main breadwinner with a young family, and you have a mortgage. If you were to die or to be ill for a while then your family could end up on the street since you couldn't pay the mortgage.
- You are self-employed running your own business. If you are unable to work (even for a short time) then how will you pay the bills?
- You are concerned about contracting a major illness since it runs in the family. How will you cope with the extra expenses?
- You have an Inheritance Tax liability but don't want to give away your assets since you may need them to pay for residential care. How will your family pay the tax bill?
- You are a small business owner and you want to be sure that if you or your business partner were to die then the shares will not go outside the company. How will your partner afford to buy your shares from your estate?
 
... and of course there are many other scenarios where insurance would help. There are situations where it wouldn't help, though - if you are a single person owning your own house, and without any family, then it could be said that there is nothing to protect. Why waste money on life insurance?!
 
Life insurance can be pretty cheap in terms of a monthly budget, though, particularly for younger people. So it's worth considering a few scenarios to understand the impact ... or ask an adviser for a financial review.

6 September 2012

Should I ... Buy an Annuity?

Now there's a difficult question. Let's assume here that you are over 55 (so you can take the benefits from your pension plans - in most cases, anyway), that you need income (because you are retiring or long-term unemployed), and that you have one or more "money purchase" pensions with which you can buy an annuity.
 
The main advantage of buying an annuity is a secure income for life. But the main disadvantages are that you can't change it once started - a standard annuity anyway, and at the moment we are stuck with all-time low annuity rates. That means the income you can buy with your money purchase pension is not much!
 
So what alternatives are there? Well, it's possible to keep your pension money invested (risking the ups and downs) and take an income from it - that's called pension "drawdown". It's also possible to defer the final decision by buying a short term annuity - perhaps 5 years. That will give you a pre-defined lump sum at that time with which to buy a lifetime annuity.
 
No easy answers, unfortunately. It's probably the financial decision which it's most important to take advice on.
 
Even if you do decide to buy an annuity, make sure you get more than one quote. That's what the "Open Market Option" is about.

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