Defer your pension draw down while waiting for rates to increase?

19th April 2012

Pension pots have suffered due to low interest rates and the Quantitative Easing (QE) which has been going on to help the economy. QE has pushed down the gilt yields which in turn reduces the annuity rates.

Options are to delay taking pension benefits, or to phase the drawdown so that the pension remains invested and an income is purchased instead of purchasing an annuity.

In these time s of uncertainty it is vital that advice is taken. Some advisers are taking the stance that savings should be invested in ISA’s, which provides an alternative income, leaving the pension fund untouched but available for drawdown if and when the situation improves.

As an annuity no longer has to be purchased before the age of 75, a delay is more achievable. This gives interest rates a chance to improve and also rates increase as you get older (because they will have to pay out for a shorter length of time). In the meantime, using interest from ISA’s can boost your income (Tax free). If your health deteriorates in the meantime you are likely to be able to buy an enhanced annuity.

As interest rates are so low at the moment, deferral appears to be the best option, the problem is that, as with any investment, you cannot rely on the rates improving in the near future.

Bearing in mind all the uncertainty, taking an annuity now could be the safest option for many and the good news is that there are still ways to improve your income. First and foremost, exercising the open market option will make the biggest difference. Shopping around is vital – you could get thousands of pounds more a year by looking for the best possible rate, but even so it is very important that the right annuity is purchased, bearing in mind the factors that determine the rates, such as dependencies, health etc.

As always, independent advice is vital in determining which option of the many to take!

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