Some years ago, many in the pensions world advised investors not to touch their pension until it was absolutely necessary. The main reason for leaving pensions until the last minute was that they grew tax-free and the older you were the bigger pension you could buy.



Here is the advice we gave (in conversational style to the client):

(Note: We are referring to personal pension style plans)

Some of your policies have not shown any growth in recent years; one reason being that they now no longer grow tax-free following the introduction of Gordon Brown's stealth tax in 1997 when he removed dividend tax credits from pension funds (raising £5bn pa in the process).

The most frightening aspect, however, is that annuity rates do not always increase with older age. We must look more closely at each of your policies.

Many policies, particularly older individual policies, contain guaranteed annuity rates. This means there is a contractual obligation on the company to pay you a significantly greater pension than you could buy on the open market.

One of the reasons Equitable Life got into trouble was that it offered guaranteed annuity rates at all ages in all situations.

Not all policies work this way and your old Sun Life policy has a guaranteed annuity rate but, unusually, it applies only on your 60th birthday. It is available only on that date and so you must now look to take benefits from this arrangement.

You have another old with profits policy which we have wanted to move for several years but did not because of high penalties. Due to your employment circumstances when this policy was taken out, we have been able to provide protection for your tax-free cash which means that the whole policy is now available as a one-off cash payment. Continuing with this policy in its present form with tax-free cash protection would mean that the lump sum available would be unlikely to increase because of the investment fund used.

At your 60th birthday we have the ability to transfer the policy to another arrangement, retaining the tax-free cash protection and achieving a better return.

However, if you feel, like many commentators, that it is going to be several years before there is any meaningful return on investment funds and you have use for a cash payment now, I suggest you consider taking all this cash and putting it in your pocket.

Interestingly, while your Sun Life policy provides the ability for you to take some of the money as tax-free cash payment, you might want to consider taking all the cash from the second policy and no cash from the Sun Life policy, so that you can take advantage of the guaranteed annuity rates.

Another interesting twist with one of your contracts is that should you die, unlike all new pension policies where the full fund value would be paid out on death, your policy provides only for a return of contributions paid.

Being an old with profits contract, you have access to the full fund on your birthday. I am happy that it should stay within the pension environment but you should transfer it to another arrangement where you have greater control over the investments but more particularly, should you die, the full fund value would be payable to your nominated beneficiaries.

As you can see, there are many circumstances why you should always review pension policies as they approach their stated normal retirement date. In fact, we would go one step further and suggest that all investors should review their pension contracts as soon as possible as it's crucial to ensure the money is invested in line with your risk profile and risk tolerance levels (i.e. what percentage fall in value you will accept during tough stock market conditions).

The Financial Tips Bottom Line

No one knows what will happen to annuity rates. Over the last 15 years, we have seen the amount of pension that can be purchased fall from around 15% to 6%. The economic climate is very worrying. There is a belief that interest rates will have to fall and if they do, you can expect annuity rates to worsen.

ACTION POINT

The old adage of leaving your pension until the last possible moment is no longer the case. You must now continually monitor the situation as there is no promise that by delaying taking your pensions, you would achieve a greater income.

Make sure you contact your adviser (or find one if you don't have one) and ask them to do an audit of your pension(s), as well as recommend solutions available.