It could be worth looking into state pension deferral, says Alan Higham, retirement director at Fidelity Worldwide Investment
People approaching retirement can ill afford to take risks with their investments. When you come to convert assets into income, market volatility can cause long term pain if markets move against you.
However, there is good news. If you are a man born before 6 April 1951 or a woman born before 6 April 1953 then there is a way to avoid all this market turbulence and to convert your assets into guaranteed income at favourable rates. What’s even better, is that you can change your mind part way and recover your capital. Here is how it works.
Consider David, aged 65, with a state pension of £6,000 a year; a company pension of £4,130 per year and £100,000 in his SIPP. He has calculated that his essential monthly outgoings are £1000. He, therefore, needs an extra £1870 of income each year. He could just draw that from his SIPP but he wants to be absolutely sure that he’ll always have enough income to cover his expenses; even allowing for inflation.
He finds that the best annuity quote would cost £55,000. This would buy an inflation linked annuity, however, rates can vary each day so this deal may not remain as competitive for very long.
Yet, by deferring taking his state pension for three years he can benefit from a guaranteed 10.4% per annum increase which will take his £6,000 state pension to £7,870 after three years plus whatever inflation has risen to in that time. We calculate that it would cost around £25,000 using a secure cash fund to cover the income he needs during those three years. Meanwhile, the new pension freedom rules mean he can withdraw £25,000 from his SIPP over those three years.
At the end of the period, he will have a secure income of £12,000 a year in today’s terms, fully meeting his essential expenses. He can then spend or invest his remaining £75,000 more freely secure in the knowledge that his essential expenses are fully covered by secure, inflation linked, income.
If his circumstances should change in those three years so that he needs his capital more than the income or if he falls ill and is concerned that he won’t live long enough to benefit from the increased state pension then he can choose to take the missing payments as a cash lump sum taxed at current income tax rate. All the payments he has then missed will be re-paid with interest at 2% above the Bank of England base rate.
Whether the markets are volatile or not, it is always worth considering state pension deferral as part of your plan to secure a retirement income as annuities are no longer just the only option.