HUNDREDS of thousands of over-55s are re-evaluating their retirement plans with the pension revolution announced in the last budget now just over six months away.
The Sunday Times has been given a glimpse into how the retirement class of 2015 will use their new-found freedom to take cash from their savings from next April 6, rather than having to tie up their nest eggs in inflexible annuities that pay an annual income for life.
The fund manager Fidelity will tomorrow publish a survey of 500 savers who are due to pick up pensions between April 2015 and March 2016. It will show that most plan to turn their backs on annuities, and that more than half will withdraw cash from their funds as soon as they can.
Alarmingly, however, there is a high level of ignorance, as Alan Higham at Fidelity explained: “With greater freedom comes greater responsibility. And this is not a responsibility that the class of 2015 was expecting.
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“Our research shows that the majority of this group have yet to start researching their options, with a number also stating that they do not truly understand the reforms.”
Savers will be taxed at their highest rate of income tax on three-quarters of their pots (25% is tax free). They must consider how to spend or invest their savings, how to make their cash last during retirement, what to do about inheritance tax, and whether to defer their state pension.
The survey put the average private pension savings for this generation at £115,845, which would provide an inflation-linked income at 65 of just £3,950 a year for life.
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Yet only a quarter (26%) said they wished they had saved more. Just 16% plan to buy an annuity, with 54% intending to take cash. Many (42%) want to treat themselves, perhaps by travelling, and a fifth plan to pay for home improvements.
When The Sunday Times spoke to several members of the class of 2015, we too found them confused, poorly informed, and yet excited by the opportunities.
Early retirement
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The new rules put retirement on the agenda for Janet Lambert, 53, and her husband David, 56. Janet, of Hainault, Essex, said: “I’ve been a nursery nurse since I was 19, and love my job, but I had begun to wonder how much longer I could continue. It is physically demanding, and I won’t get a state pension until I’m 67.”
She has pensions from two London councils, but these were frozen 25 years ago when she gave up work to have her son. Since then she has worked only part-time.
“My husband and I don’t have plans to spend lots in retirement,” she said, “but I enjoy charity work and there are a lot more things I would like to get involved with.”
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David has worked for HSBC for 37 years, so has built up substantial benefits in a final salary pension. But he will not reach company pension age until 65.
Our tips. The Lamberts are still quite young to be considering retiring, and they must weigh their options carefully as they both have final salary pensions. These are generous schemes but normally reduce a pension by between 3% and 5% for each year taken before the company retirement age. If it is 60, you could lose 25% of your entitlement by taking the pension at 55; if it is 65, you could lose half.
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Chris Noon of the actuary Hymans Robertson, said “Unless they have substantial other savings on which to live, they might be a bit too young to consider retiring right now. They will lose too much taking their pensions early.”
Danny Cox at the adviser Hargreaves Lansdown said: “It won’t make sense for them to cash in their pensions. They would have to transfer out of their final salary schemes to do so and the penalties for doing so would be too high.”
Deferring state pension
Denise Hayes, 62, works full-time as a secretary for a firm of accountants. Widowed five years ago, she said: “I reach state pension age in November, but I have decided to defer taking it. I have a few small pensions, but I want to save more, so will keep working.”
Hayes, of Taunton, Somerset, receives a widow’s pension from her husband’s private savings, and also has a civil service pension that she built up during her early years at work. On top of that, she has a stakeholder pension worth about £15,000, and an Equitable Life pension with “poor” returns, she says.
Our tips. Hayes has made a wise decision to defer her state pension, as it will earn her a 10.4% uplift for each year she does not take it. On top of this, if she took her pension while she was working, she would lose 20% in income tax.
Noon said: “In her case, I would consider spending my other pension pots on retirement, and keep [deferring] the state pension as 10.4% is a good return. Doing this she is effectively building up the annuity she wants as cost-effectively as possible, but with the state rather than an insurer.”
Hayes is fortunate, because although the government is cutting to 5.8% the return available from 2016 for deferring a new state pension, this will not hit those who are already deferring older-style pensions, and who will continue to enjoy the 10.4% return.
Continue working
Project manager Jenny Robens, 64, from Watford, is still working part-time and she and her husband Richard Swaby, 66, will probably continue working for a few years.
She has always worked, allowing her to collect a selection of pensions, but they are all relatively small — about £120,000 in total. She is already claiming her state pension. Richard, a self-employed electronics engineer, has similar levels of private savings.
Jenny gets free financial advice at work, and they are advising her to move into drawdown — keeping the pension invested while money is drawn from it.
Our tips. As Jenny is working and claiming a state pension, she is already paying tax, so it makes sense to leave her other money invested. When she decides to retire, she can take 25% of her savings tax-free, but she may be able to withdraw more. For example, if her state pension is £5,500, she could take out another £4,000 a year or so from her pension funds without paying income tax, depending on the personal allowance when she retires.
Case study
Denise Hayes, 62, of Taunton, Somerset, loves her job as a secretary and plans to continue working full-time. A widow with no children, she fears she would be bored if she stayed at home. When she finally retires, Hayes plans to travel as much as possible, but also believes she will need some security, so it is likely that she will buy an annuity with part of her pension savings