Help! Should I delay retiring until 2015?

Published by Rachel Lacey on 04 June 2014.
Last updated on 04 June 2014


In his 2014 Budget, George Osborne announced that from this date savers with defined contribution pensions - so not final salary - will be able to use their pensions as they choose. So while you can still choose to buy an annuity, or go into income drawdown, you'll also be able to cash your pension in and do whatever you like with the money.

Until now savers have had to use their pension to generate a retirement income: wealthier savers could enter into income drawdown arrangements, where their money remains invested and an income is siphoned off, but the vast majority of people had little choice but to exchange their fund for annuity which provides an income for life. Only those with the smallest of pensions were able to take them as cash.

Interim measures

Ahead of the major changes scheduled for next year, Osborne also announced an almost immediate relaxation of the rules to benefit those savers that are retiring before April 2015.

Pension savers with pensions worth less than £30,000 (up from £18,000) or three smaller pensions worth less than £10,000 (previously £2,000) will now be able to take the lot as cash. The tax rules haven't changed, however, meaning you'll only get the first 25% tax-free. Income tax is paid on the remainder at your marginal rate.

Investors going into income drawdown get a better deal too. The maximum income that can be drawn has been increased from 120% to 150% of what could have been achieved with the equivalent annuity. More people can go into flexible drawdown too – where you have free rein to take as much or little as you like in income. Now you only have to demonstrate a separate and reliable income (including state and any other pension income) of £12,000 a year – up from a previous level of £20,000.

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What should you do?

While this is undoubtedly an improvement on the previous position – many people planning to retire before April 2015 will now be confused as to what to do.

Before rushing into any decision, Jonathan Watts-Lay, a director at Wealth At Work – an organisation that provides financial education in the workplace – says people need to consider the bigger picture.

"Don't just think about your pension, think about all your assets and your partner if you have one," he advises. "Why do it right now if you have other sources of income?" You may, for example have income from stockmarket investments, a rental property, or you might have Isas you can cash in. "When you draw down money from your Isa it's tax-free," he adds.

Steve Lewis, head of retirement distribution at LV=, adds that you should look at how much money you have coming in from any other reliable sources including company pensions and the state pension. "Ask yourself if you have £12,000 coming in a year in secure income. This is the minimum requirement for flexible drawdown and means you can already take all your money once if you want to." In other words, you are already eligible for the flexibility that the 2015 change will bring.

What if I need an income?

For those who need income and cannot look to other sources, the options are a bit more complicated. The most obvious fix is, if it is possible, to stay in work and delay your retirement. This has the added benefit of allowing you to carry on earning and saving. And, if you have reached state pension age, you may get benefits from deferring that too.

Should you defer your state pension?

However, depending on your circumstances it may be that the changes don't affect your decisions as much as you'd originally anticipated, or you can buy yourself some time with some clever planning before the options open up next April.

Use your tax-free cash

When you unlock your pension you are able to take 25% of it as a tax-free lump sum. "If you aren't going to be spending it or paying off debt with it, you could take that and live off it until April," says Lewis.

If you've already got plans for your tax-free cash then your only other option is to start taking an income from the remainder of your pension. Lewis says that if you need an income, are cautious and want it to be guaranteed then an annuity will still make sense and there's no real need to hold off. "There is still the option of an enhanced annuity if you are in poor health or an investment-linked annuity."

He adds: "With-profit annuities provide a high level of guarantee while providing some potential for investment growth. If you are going to live for another 30 years, it's a counter to inflation."

But if you still need an income, but don't want to commit to an annuity, providers have been quick to rustle up an alternative. Lewis says: "For those who want to keep their options open and are still pretty cautious then it's worth looking at one-year annuities."

These have been launched by insurers including LV= and Just Retirement. In return for a lump sum, they will provide you with income for a year before a pre-agreed lump sum is returned to you when the contract terminates. You can then use that money however you like, as the new rules will be in force at that point.

With the LV= plan a £50,000 pot would buy a maximum income of £4,425 over the year, after which a 'guaranteed maturity value' of £45,164 would be returned to the customer. This includes a typical commission payment to the adviser of 1.1%, so in return for effectively 'parking' their money until these new rules come in, policyholders do need to accept a loss – in this case £411.

Death benefits are the same as with income drawdown plans, so if your money goes to your spouse and remains in the pension no tax will be payable, however if your beneficiaries wanted to cash it in, it would be taxed at 55% (although this is expected to come down to your marginal rate from April 2015).

So long as you survive the year, these plans aim to provide investors with the peace of mind that they know exactly how much money they have to generate a more long-term income when the new plans come into force.

However, the major downside is that commission payments can take a sizeable chunk out of your equity and you have no investment growth to recover that loss.

Income drawdown

For this reason investors with a greater tolerance for risk may still benefit from going into income drawdown before April 2015 and benefit from an income worth up to 150% of what could have been achieved with the equivalent annuity. Nonetheless, Lewis says this sort of saver still needs to take care of their fund. He says: "You don't want to put it into too high a risk fund. Funds that give you a degree of protection will come into their own here."

Experts believe that even if you go into income drawdown before the rules change, you'll still be able to benefit from them once they are introduced. The only people who won't be able to enjoy this newfound freedom are those locked into lifetime annuities.

Cashing in your pension

Under the interim measures more savers with smaller pensions will be able to cash them in. However, Laith Khalaf, head of corporate research at Hargreaves Lansdown, says that you need to be mindful of tax – there's no point moving money out of such a tax-efficient vehicle, just for the sake of it. "The question is: what are you going to do with the money? You don't want to bump yourself up into a higher tax bracket. If you do need cash you may need to stagger withdrawals over a number of years."

Talk to your pension provider

Before making any decision it's worth speaking to your pension provider about what it will allow you to do.

For example, you may not just be able to take your tax-free cash without turning your remaining fund into an income - meaning you can't just leave the rest of your fund invested. In these cases you would have to move all your money into a pension with an income drawdown facility such as a Sipp or park it in a one-year annuity.

Likewise, even if you like the idea of cashing in smaller pots, this is only an option if your pension provider updates its systems to allow this for the interim period between now and April 2015. "The changes announced in the Budget were permissive not mandatory. It's up to pension providers to make the changes. Some providers won't get around to doing it," warns Andrew Tully, technical director at MGM Assurance.

Guaranteed annuity rates

Your pension may also include valuable guarantees that only apply if you retire at a certain point as NFU Mutual warns.

Personal finance specialist for the insurer, Stephen Berry says: "Many people who are at or approaching retirement are delaying pension decisions until 2015 because it may increase the number of options open to them. However, there are hundreds of thousands of policyholders who may risk losing a guaranteed annuity rate - which could be the most valuable option of all."

He adds: "Anyone who took out a pension before 1990 and is now looking to delay when and how they use it should check their policies first."

GARs mean policyholders get a far higher income than they could otherwise achieve with a standard annuity. And while some insurers allow policyholders to take their guarantee over an extended time period, others are less flexible, forcing them to retire on specific dates such as their 65th birthday.

The new flexibility being offered to investors is without doubt a massive boon, but just because you have more choices it doesn't necessarily mean that you should take advantage of them.

As Khalaf points out, while the rules may have changed, the fundamentals of pension planning have not. "A lot of people will want to hold off retiring until 2015 – people don't like annuities both for their rates or their inflexibility, but you still need to focus on the fact that you have this pot of money and you need to make sure it lasts your retirement."

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