How it can pay to put off your pension

INVESTORS wishing to take the benefits from their personal pensions will no longer be forced to buy an annuity that fixes income for life as soon as they retire.

Under previous rules, the investor taking benefits from an ordinary personal pension could take up to one-quarter of the value of the contract as a tax-free cash sum, but had to use the balance to buy a fixed annuity from a life company at the going rate, which might not be favourable.

Annuity rates quoted by life companies depend on four factors - current interest rates, mortality rates, the sex of the investor, and expenses. The dominant factor is the prevailing level of interest rates, plus an allowance that represents the capital surrendered by the investor.

During the years of high interest rates, annuity rates were accordingly high, and investors taking benefits from personal pensions received high levels of income. But as the Government brought down interest rates, actuaries at life companies lowered annuity rates.

Indeed, annuity rates have fallen by more than a quarter over the past few years, and investors have consequently been receiving lower incomes from personal pensions.

Now the Government cannot repeal the laws of economics and have high interest rates for savers and low interest rates for borrowers, much as it might like to do so.

However, to meet the demands of investors holding personal pensions, it has introduced a facility whereby an investor can choose to retire and take the tax-free lump sum but defer buying an annuity. Instead, he or she can take income direct from the personal pension contract in the meantime.

So if annuity rates are low, the investor can take income from the pension fund and wait until annuity rates are more favour- able. But it is by no means as simple as it sounds.

If the investor elects to take income from the fund, that income is also subject to limits.

These are determined by the value of the contract at the time the benefits are taken, and the hypothetical rates produced by the Government Actuary, which depend on the age of the investor and the yields on long-term gilts at the time the benefits are taken. Naturally, there are separate rates for men and women.

These hypothetical rates approximately reflect current annuity rates at the time the ben- efits are taken.

For example, a man born on 1 May, 1930, decides to take the benefits from a personal pension on 10 July, 1995, at age 65. The applicable yield, based on the yield on gilt-edged stocks, is 8.23 per cent, and the total inocme available is 11.4 per cent for men and 10.3 per cent for women.

The minimum income, which the investor must take each year, is 35 per cent of the maximum income.

The investor has complete freedom to decide how the remaining funds in the personal pension are invested. But every three years, the maximum / minimum income is reviewed, based on the value remaining in the contract and the hypothetical rates applicable to the age of the investor and long-term gilt yields at the time. This review is repeated every three years until an annuity is finally bought.

The intention of these reviews is ensure that the investor monitors the amounts being taken out of the personal pension contract and to provide a warning if the funds are being depleted too rapidly. Nevertheless, it is possible that the maximum income that can be taken could be reduced after three years - if investment returns are low and interest rates fall over the three-year period.

The investor has the opportunity of buying an annuity at any time with the balance of the value of the contract. However, the purchase of an annuity cannot be put off beyond the investor's 75th birthday.

If the investor dies before buying an annuity, his or her dependents can continue making income withdrawals until the investor would have been - or the dependent is - 75, at which point the latter can buy an immediate annuity or take the remaining value of the fund in cash, less tax at 35 per cent.