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.

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