Wednesday Wealth Dilemma: Pensions

by Andrew Morris on 18 January 2010  |  5 comments
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Welcome to our brand new wealth blog. This week's dilemma: I'm a few years off retirement and worried about my pension pot. What's the best way to boost my income in retirement?

I'm the CFO of lovemoney.com. In other words, I'm a qualified bean-counter who's been around the block a few times, and I still don't know which way to go on the crazy-paved pensions path. 

That's why I'm writing this blog. Because I need your help to figure it out.

Liquid investments

My 20s and early 30s were a write-off in terms of long-term investing. What spare cash I had ended up at the bottom of a Bermuda rum bottle, or as a ticket to somewhere even more exotic. 

Yes, I know now that this is exactly the time I should have been stashing away some cash for a distant retirement, but I couldn't get excited by the power of compounding when I had to focus on my golf swing. And flying down to Rio. 

The recovery period

Back in the UK in my 30s, I worked for a Japanese company that didn't provide a company pension scheme. Any spare cash went on the mortgage and rehab fees. 

Better late than never.....

It was only in my early 40s when I joined The Motley Fool, lovemoney.com's creator, that I began to be aware of the need to save for retirement. Through a stakeholder vehicle initially, and more recently a SIPP, I tried hard to make up for those lost years. It made sense to me to grab the free money on offer from the company's contributions and the tax relief from HMRC, and to invest in equity funds for longer term growth, hopefully in excess of returns from other asset classes. 

So where am I today and what's the dilemma? 

I've built up a reasonable amount in my SIPP, helped by the recent surge in equities after the credit crunch collapse. But the problem is... what income will it generate for my retirement? 

Looking at Hargreaves Lansdowne's annuity quote service  recently, the best annuity rates are around 5% for a level payment (no guaranteed minimum period, and with 50% of non-protected rights to the missus), and a miserly 2.5% if the annual income is to keep pace with RPI inflation. 

Given that I plan to book an Easy Jet flight to Dignitas in Zurich as soon as I can no longer climb up or ski down mountains, it doesn't look like I'll get close to receiving my hard-earned money back. And the thought of the pension pot remaining after my wife Gill & I have both snuffed it going to the annuity company is, frankly, stomach-turning. 

I like the increased flexibility now provided by the USP (unsecured pension / income drawdown) and ASP (alternatively secured pension) options. But these are not without risks, as lovemoney.com writer Jane Baker explained in Draw a bigger income from your pension pot and are not likely to significantly enhance your annual income. 

How much?

lovemoney.com writer Neil Faulkner will argue that you don't need much income in retirement anyway, assuming the mortgage is already paid off. Well, I don't know about you, but I want to enjoy my final years rather than endure them. I plan to eat well, travel often and grasp the last embers of life in both hands, not shuffle along to the Post Office every Wednesday to grab the state pension just so that we can have a bowl of soup and watch Corrie before the heating goes off.  

Help

So here's the dilemma..... 

• Should I carry on paying into my SIPP? Tax relief is still available, but we've suspended company contributions for now, while lovemoney.com gets up a head of steam
• Should I invest instead in ISAs? More control over them and tax efficient, but effectively capital rather than income
• Pay down debt instead? Either our UK mortgage, or the one for our so-called investment property in the French Alps....zut alors, more on that dilemma in a later blog post
• Diversify and invest in other asset classes, whether gilts, fixed interest securities, property, gold or a thoroughbred nag? 

Please let me have your thoughts on what I should do, and how you're addressing this conundrum yourself by adding a comment below. 

And if this post has helped you to think more about your own retirement planning, why not adopt this goal: Get ready to retire now. 

"Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese." - Gene Perret

About me

Read this introductory post to find out more about me and why I'm writing this blog - it's about growing our wealth together through this social finance platform we're creating here at lovemoney.com. 

The small print 

• anything I write relating to Growing your Wealth is my personal opinion, and not that of lovemoney.com
• I am neither qualified nor authorized to give personal financial advice
• As CFO of lovemoney.com, I have quite a busy day job that demands most of my focus. For expert help, check out our expert help page!