Should I stay in work or retire?

Noel Bergmann is a 64-year-old shopping centre manager in Sutton, Surrey. He lives with his wife Patricia, a care assistant, in Westerham, Kent. Noel currently takes home £2,560 a month and pays contributions into three different pension plans, amounting to £770 a month.

He is in the enviable position of owning his home, with no outstanding loan repayments. Any credit card debt he acquires is paid off in full at the end of each month.

He has considerable savings: over £10,000 in cash savings accounts and about £26,000 across two individual savings account. He also has an investment bond of £21,500 with Standard Life.
Noel has four previous employer pension schemes held with various companies, and two current pensions, one personal and one company, both held with Scottish Widows. In total, his pension pots amount to approximately £200,000.

“I had an IFA report in 1997 and, based on its advice, I took out my personal pensions. These, in theory, should provide me with an income that would give me a reasonable standard of living in retirement,” he explains. “However, the events of the past 18 months seem to have put paid to that in the short term. So, my question is, what should I do with the pension funds: should I retire now or defer in the hope that things will improve?”

Money Makeover

Sally Moloney, an independent financial adviser from Chartwell Independent, in Westerham, recognises Noel’s dilemma.

“Like many people currently approaching retirement, Noel feels that if he postpones the decision to take his pension income now he could see the value of his pension funds increase and annuity rates improve,” she says. “But if he does choose to continue working, he will need to discuss with his employer whether it will continue to make contributions to his current group personal pension scheme.” 

As a higher-rate taxpayer, Noel could also consider deferring his state pension when he reaches 65. The state pension is taxable, but is paid gross and will automatically be set against his available personal allowance, which means he will be liable for tax on a greater proportion of his salary than he currently pays.

By deferring the income from his state pension, Moloney points out that Noel also boosts its value. “For every week it’s deferred, the Department of Work and Pensions will increase the benefit by 0.2%,” she explains. “This is the equivalent of a 10.4% annual return – a very good increase indeed in these low interest-rate times.”

However, Noel doesn’t have to stop working in order to take income from some of his pension plans. Moloney suggests contacting the administrators of his different plans to check their conditions and request a retirement benefit statement.

The other option for Noel is to stop work completely and take his pension now. If he decides to do this, then his priority will be to sit down with his wife and work 
out their combined income. They can then set out a realistic budget for themselves.

“Retirement is often described as the longest holiday of your life,” Moloney says. “And it’s during their early retirement years that the Bergmanns are likely to have the time, and hopefully sufficient good health, to pursue leisure activities.”

Noel has a medical history of high blood pressure and cholesterol, which he describes as “under control” with the help of medication. Nevertheless, Moloney advises him to find out whether 
he is eligible to receive an enhanced annuity rate, and therefore a 
higher income, because of these health problems.

Annuity levels are based partly on life expectancy, and some companies specialise in offering enhanced annuities that provide higher rates for people with health problems.

Once he has found out the rate each of his personal pension providers are willing to offer, Noel should then research the rates available in the open market. Some people fail to realise they don’t have to buy their annuity from one of their pension providers, and the pension providers themselves don’t always make it clear to their customers that they are free to shop around.

Moloney explains: “Annuity rates vary from company to company, and there’s usually a big difference between the best and worst prevailing rates.”

There are also many different annuity options: single life or joint life; an annuity where the income remains level or one where the income increases each year (known as an ‘escalating annuity’).

A further possibility is to buy an annuity with guarantees such as income and lump-sum death benefits. Moloney says: “Five and 10-year guarantees are not very expensive, so they’re worth going for.” Before buying the annuity, Noel also has the option of taking up to 25% of his funds as a tax–free cash lump sum.

At the moment, though, he hasn’t any plans that need financing with a lump sum, and as his main concern is to secure a good income, Moloney sees no real reason for Noel to cash in any of his pensions when he retires. “Noel is lucky enough to be debt-free at this stage of his life,” she comments. “And he has no plans to invest or buy a second property.”

Furthermore, if Noel decides to take a lump sum, it’s doubtful he could find an investment to provide him with a return as secure as his pension.

If he plans carefully, Noel can ensure his wife benefits from any decision he takes. A joint annuity would continue to pay out to Patricia if anything should happen to him. She also has a pension of her own and, since they own their house outright, the couple would not have to worry about outstanding debts.

Their house is worth around £250,000, and Moloney says they are well under the limit for inheritance tax, so their two grown-up children will not have to worry about IHT liabilities.

It is often said that the financial decisions you make for your retirement are the most important ones you will ever face. This is why Moloney stresses Noel should consider all available retirement income options.

“If there’s one time in your life when you take financial advice, it should be when you’re thinking of retiring,” she says. “It’s such a complex area, and there are so many choices to make.” Noel felt instantly at ease after his meeting with Moloney. “The woman is a wealth of knowledge,” he marvels. “I feel so reassured, and I’m no longer anxious about my future.”

Sally Moloney is principal of Chartwell Independent in Tatsfield, Westerham. Contact via email or call 01959 571 418.