When should you retire?

published 14 December 2018

926_MW_P21_Pensions — Delaying taking a pension must be weighed up carefully

It's not always easy to decide when to start drawing your pension. Last month saw the completion of a 20-year project to equalise the age at which men and women may start receiving their state pension; the government now plans to raise this age from 65 to 66 by October 2020 and to 67 by 2028. But with both state and private pensions, the longer you leave it to take your benefits, the higher the income you'll be entitled to.

On state pensions, the deal is straightforward. For every nine weeks that you leave it to begin claiming your pension, you get 1% more income; over a year, that's worth 5.8% extra pension, or £479 extra at current pension levels. If you don't need the money that could be tempting, but you must make a calculation.

It will take around 17 years of higher payouts to make back the money you missed out on during the year that you deferred, which takes a 65-year-old today to around the average life expectancy. If you're in good health, you may be happy to make this gamble, but there can be no certainties.With private pensions, the option of deferring could be more attractive. On a £100,000 pension fund, the annual annuity income available to a 66-year-old man, at around £5,750 a year (according to figures from the Money Advice Service), is around £400 higher than for a 65 year-old man.

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That would mean breaking even on deferral after just under 15 years, but you could do even better. For one thing, you'll have another year to invest your pension fund, potentially increasing your purchasing power. Annuity rates are also on an upwards trend.

Having fallen sharply in the wake of the EU referendum vote in June 2016, they have since recovered about 20%. If the Bank of England puts interest rates up next year, as is widely expected, annuity rates will rise once again, so waiting to make a purchase could be even more productive.

Weigh up your options

For savers planning on avoiding annuities, at least for now, and drawing pension income directly from their funds, it's a similar trade-off. The more you leave invested in your pension fund, the greater the impact of ongoing investment growth will be on the income it is possible to take in the future. But will the extra growth deliver enough to compensate you for income foregone? Your fund may even fall in value if markets disappoint.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.