| The choice is yours on retirement |
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| Written by Jonquil Lowe, 2006 | |
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Page 1 of 2 Changes in the law are giving you greater freedom over when you retire and how you organise your pension. Jonquil Lowe explains.
In April 2006, many restrictions about how you save for retirement, when you retire and what form your pension takes were swept away. The changes opened the way for a much more flexible approach to retirement – something people around the world say they want (see box “Carry on working”). New anti-age-discrimination laws that come in from October should help to make it happen. When to retireThe minimum age at which you can start to draw your pension, currently 50, is being increased to 55 from 6 April 2010. But, under the new tax rules, you no longer have to stop work in order to start drawing a pension from your current employer’s scheme. So, in theory, you could cut back to part-time working and start drawing a partial pension.A survey by the consultancy firm Mercer, just before the new rules came in, found that, in practice, nine out of ten employers have yet to change their own scheme rules to allow partial retirement. But experts reckon partial retirement will catch on over the next five years and that employers will make the necessary changes once enough of their scheme members show an interest. So, if this is an option you would like to have, talk to your employer. From October 2006, in general you cannot be forced to retire before age 65 and your employer must consider any request you make to work beyond age 65. Carry on workingA recent survey* across 20 different countries around the world found that nearly three-quarters of people (72 per cent) want mandatory retirement ages scrapped and believe we should be allowed to go on working for as long as we are capable. Respondents gave various main reasons for wanting to stay on at work (Figure 1).* HSBC Future of Retirement Research 2006. Click on the image to enlarge in a new window.  Taking a lump sumAt retirement, you can take part of your pension benefits as a tax-free lump sum. Sometimes this is automatically paid in addition to your pension, but often you can choose whether to take a lump sum and, in that case, your pension is reduced. Under the new tax rules, many people can now take a larger lump sum than in the past and generally people like to opt for the largest possible amount. But this is not always a good idea.In the sort of occupational pension schemes that promise you a certain amount of pension based on your pay (called ‘defined benefit schemes’ and including ‘final salary schemes’), the scheme rules set a sort of exchange rate between pension and lump sum. To fairly reflect the amount of pension you are giving up, this rate needs to be set at around £20 lump sum for each £1 of pension given up if you are retiring around age 65. But many schemes offer less – see the case study above. If the deal offered by your scheme looks poor, consider taking no lump sum or just a small amount. Choosing your pensionDefined benefit schemes pay you a pension direct from the scheme. All other schemes work on a ‘money purchase’ basis, which means you build up a fund of money that is typically used at retirement to buy an annuity. This is an investment where you pay a lump sum and in return get a regular income usually for life. The amount of income depends among other factors on how long you are expected to live – the longer your life expectancy, the lower the income.Occupational money purchase schemes must let you shop around for your own annuity if you want to, but often the scheme will be able to offer you a better deal. If you have a personal pension (which includes stakeholder schemes), it’s always a good idea to shop around for the best annuity. To help you do this, use the Comparative Tables compiled by the independent regulator, the Financial Services Authority (FSA) (Figure 2). Click on the image to enlarge in a new window.  Figure 2. FSA Comparative Tables help you shop around. Taken from the FSA's Comparative Tables (www.fsa.gov.uk/tables) as at 12 May 2006. © The Financial Services Authority |
