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Delaying Taking Your Pension Could Actually Cost You Money

Waiting for annuity rates to increase could mean you lose out on thousands of pounds of pension income.

Pension plans often focus your thoughts on saving money with a long-term strategy. They don’t encourage you to consider what could happen if you choose to draw your pension income earlier instead of waiting for increases in annuity rates.

In fact, drawing your pension out later on could mean you’re losing thousands or even tens of thousands of pounds of pension income. This blog will explain why it might be better to draw your pension income earlier than you thought.

Why you might delay your pension

As with any financial investment, there are advantages and disadvantages to each situation. Before we look at why delaying your pension could cost you, let’s take a look at why you may want to hold on a little longer.

Crystallising your pension, which happens when you start to take an income from it, means you’re effectively turning the fund into cash. It won’t grow in size from that point: your fund is set. Delaying your pension to hold on to your investments could, in some cases, continue to grow your final pension amount.

In addition, annuity rates may rise over time which will increase the annual pension income you could receive from your fund.

However, both of these situations may still result in losing money overall.

Why holding on could cost you

It’s all about working out the balance. Holding on for a raise in annuity rates could leave you with a greater annual income. However, the raise in rates isn’t guaranteed and may also still be significantly lower than the amount you could gain by drawing your pension earlier.

You need to consider the long-term impact of holding out for a higher annuity rate, too. Waiting a few years to achieve a higher rate may mean it would take decades to recuperate the income lost during the period you waited for the raise.

The numbers explained

It’s easier to visualise the numbers to see exactly how much you could gain by taking out your pension income early.
The sample table below uses a typical example of how pension savings delayed by six years could lose you over £40,000.

Current Pension Savings £150,000
Current Predicted Pension Income £6596.16
Time Delayed 6 Years
Predicted Pension Income in 6 years £7471.92
Income Lost in 6 years £44,524.08
Years to Recuperate Income 50 Years

As you can see, the increase in the predicted pension annual income six years into the future is more per year than if the client were to draw their pension now.

However, the annual increase doesn’t add to the total pension received. Instead, the client loses £44,524.08 over the period of six years. This is because the increase in the predicted rate is still lower than the total amount drawn over even one year on the earlier rate.

In this example, it would take fifty years to claw back the benefits of holding on for six years before drawing your pension.

How to work out your best option

The above example is only illustrative and is based upon someone looking at a lifetime annuity. It may be that holding on to draw your pension income is still the best option for your personal circumstances.

Working out when to take your pension is confusing. Our team of expert financial advisers and retirement specialists can talk you through the options best suited for your personal circumstances. They’ll even help you work out a personalised cost of delay figure to help you decide if you want to draw your pension earlier rather than later.

For any questions about your pension options, including the cost of delaying your pension, please contact our team on 0800 689 9335 and they’ll be happy to help.