Ask Sindie: Pushing 66, and still paying for a pension

An older worker is unsure how best to plan for retirement

I will be 66 on 31 January next year and am still working, albeit temping.

Each month, I pay into two [personal] pension policies with Lincoln Financial Group - £103 net (£132 gross) and £43 net (£55 gross). They have been valued at £32,000.

Is it advisable for me to continue to pay these monthly premiums while I'm still working?

I haven't yet made a firm decision about when to retire, after which I will have to buy an annuity [a guaranteed income for life]. I know that I'm allowed to take 25 per cent of my pension as a tax-free sum. Would it be wise to do this and invest the £8,000 separately?

Or is it better to have a larger annuity from the full pension fund?

I currently receive a state pension of £601 per month; my earnings from my temping job are £236 per week. I have £18,000 on deposit and no mortgage on my house.

VB, by email

Deciding whether to continue contributing into a pension past the "normal" retirement age of 65 is going to be an increasingly common dilemma as more of us than ever before carry on working in later life.

As a rule, paying bigger overall contributions to a pension scheme will increase your pension pot and give you a higher income when you finally cash it in.

Billy Burrows of annuities adviser WBA says: "Generally speaking, it is probably to your advantage to continue making payments [while you're still working].

"Your premiums will attract tax relief and the funds will grow net of tax."

As for when you retire, you'll have several options.

One, as you suggest, is to take the 25 per cent in tax-free cash. Mr Burrows agrees this could work in your favour: "It normally makes sense for savers to take the cash, even if the intention is to use it [for long-term investment]."

For example, the money could be invested in a unit trust fund inside an equity individual savings account (ISA) to give you an income in retirement. If you want a low-risk option, a good mini cash ISA would pay around 5 per cent interest.

Alternatively, Mr Burrows suggests you could use the £8,000 immediately to buy a "purchased life annuity". This would be separate from the annuity you'll buy later with the rest of your retirement savings.

"[Specialist] annuities have a tax advantage because you are only taxed a small proportion of each payment," he says.

If you keep all your pension money together, there's no guarantee of more income as annuity rates may fall. Note, though, that the older you are when you take out an annuity, the better the rate should be, since your lower life expectancy will result in higher payouts.

If you need help from our consumer champion, write to Annie Shaw at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email sindie@independent.co.uk. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.