QUESTION : I was due to retire and draw benefits from my pension plan. The value has fallen significantly and I am in a quandary as to what I should do.
ANSWER: The question you pose is one which unfortunately is being asked by many people at the moment.
Investments have fallen significantly this year. Given time, things will recover. However, for those not in a position to wait, like those facing imminent retirement, waiting for recovery is not an option. This is probably one of the reasons behind the large reduction in people choosing to purchase an annuity at this point.
This is despite the fact that annuity rates are as high as they have been for some time.
The thinking is that if individuals have seen their pots drop, in some instances by around 40%, then to consolidate that fund now into the purchase of an annuity will result in an income which will be much lower for the rest of their life than it would have been had they converted the fund into a pension at the start of the year.
Hindsight is always a wonderful thing.
The groups of imminent pensioners most at risk are those who had their pension funds invested in what are termed managed funds.
A managed fund has a number of different investments such as property, gilts and equities. Historically it had a large proportion tied up in equities, which as we all know have seen a dramatic fall.
Many of these individuals have been unaware that their pension pots were so heavily geared in this way.
One option is to consider deferring drawing benefits from the pension scheme and use other assets as a source of replacement income. Ideally this income should be drawn from sources that don’t offer the prospect of a rise in value when the state of the economy improves.
A good example of this would be monies on deposit. Due to the nature of cash, this capital asset has not fallen in value this year; however as interest rates are trimmed and continue to fall in 2009 the prospect of growth from cash looks highly unlikely.
So if you have monies in bank and building society accounts, this should be used to generate an income. Another option would be to consider drawdown rather than taking an income straight away. This effectively means that your fund remains invested but you have access to your tax free cash entitlement and a regular income.
By remaining invested you are hoping that over time, as investments recover, you may then be in a position to consider locking into an annuity rate.
There is, however, no guarantee that this will happen in the short term, and you need to balance the fact that even if your fund grows, your income could be reduced by falling annuity rates.
The final option is to consider the purchase of what are known as investment linked annuities. These are in effect the middle ground, and allow investors to lock into current rates on offer whilst at the same time, see their future income improve as investments generally recover.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact firstname.lastname@example.org or (028) 9022-1010.