After George Osborne’s Budget announcement that up to five million pensioners would be able to cash a lump sum for their pension instead of a guaranteed annuity, concern has risen regarding the stability of the whole setup. At the moment, when taxpayers pay into their pension fund, they enjoy a tax relief of 32%, or up to 50% depending on their tax banding. This is made so the taxpayer can be supported in retirement instead of having to rely on social security. The main concern with a lump sum is if the pensioner spends it all on frivolities, or give it to his children, he would then be able to claim social security, meaning taxpayers would have paid twice for his pension.
In a recent press release, Scottish Friendly Director Neil Lovatt has warned that cashing in on annuities could be costly to pensioners. He affirms you will never get a good deal out of it, since it is likely people in poor health who will try to cash out, and as such the company would offer a very low rate for a lump sum.
If you would like to cash out on your pension, instead of receiving a small annuity for the rest of your life, you have to think carefully. Are you a good money manager, able to save the better part of that lump sum, invest it wisely, and grow it to produce an income higher than what you would receive as an annuity? If the answer is yes, by all means, go for it. If you are unsure, or have little savings to show for as you approach retirement, the wisest move is to opt for your annuity. Especially if you plan on living for a few more decades.
It may even be better for you instead of cashing out for a financial emergency to just apply for a loan, and cover the instalments with your annuity. Say you need a hip replacement, or want to change the roof on your house. Hopefully you have enough equity on your house to do that independently, but otherwise you can always try to get extra finance this way, and preserve your pension.
You have reached the age of retirement, and it would be really sad that you are forced back to work because you chose to cash out, had a few fun years and now can’t afford your lifestyle anymore. What looks like an emergency today is probably nothing in comparison to the terrible emergency of not being able to afford the roof over your head and the food on your table 20 years from now, when you have trouble walking and need medical attention.
There will never be a perfect setup, especially if you reached retirement age with only a small nest egg. You should talk to a professional financial planner to determine the best move for you. The local Citizen Advice Bureau can also be of assistance and help you get affordable help. Before you make a decision on whether you would like to cash in on your annuities or keep them going for as long as you shall live, lay down the numbers and make a projection like you are going to live for 110 years. It would be unfortunate to outlive your money and become a burden to your family.
This post was written in collaboration with Scottish Friendly. You can follow them @scotfriendly.