Pension Changes

From today those over 55 can claim and spend their pension which will help the economic recovery however many pension firms and employers have echoed the government’s caution with their own warning that they are not ready for the changes.

For years those retiring at the end of their working lives were effectively forced to hand over their accumulated pension pot to a big pension company to buy an annuity – which in return would pay a set monthly income until death. About 400,000 people spent £12bn last year buying annuities, approximately 20% of pension customers are eligible to cash in funds from today.

The three government-backed “guidance” services that are supposed to aid those looking to cash in their pension pots cannot currently be promoted publicly due to election rules – see our article: Purdah.

All cash devalues over time due to inflation. This is called the Rule of 72 or you can use the Rule of 70.

RULE OF 70

To determine the time for money's buying power to halve, financiers simply divide the rule-quantity by the inflation rate. Thus at 3.5% inflation using the rule of 70, it should take approximately 70/3.5 = 20 years for the value of a unit of currency to halve.

Though you may be getting interest the actual value of your lump sum is diminishing.

The way forward is to invest in real assets such as property or stocks and shares which provide both a return in rent or dividends and capital growth.

One thing NOT to do is to blow it all on having a good time and relying on a state pension, you might not have one!