Becoming a pensioner
Financial planning and investing for the future are matters that we all understand are important. Some people are better than others at acting on this knowledge. For most of us, it is a bit of a shock when the future arrives. I used to say that the definition of being old is when pensions start to sound even remotely interesting. For me, it took an “external influence” in 1986 to give the matter some initial thought …
I effectively started my current job in February 1986. [I wrote about some of my history here.] My new boss told me what my salary would be and I was good with that. He also said that the company, being tiny [there were 3 of us], had no pension scheme, so I would be paid an extra 10% each month instead of a company pension contribution. It was up to me how I used this extra money, but he recommended a financial advisor from whom to seek advice. I must have had an uncharacteristic surge of common sense, as I did go and see this guy. I think that I was beginning to ponder the future more seriously at that time, as we were planning to start a family in due course.
The advisor and I discussed options and eventually concluded that maybe I should plan on retiring at 60 [that sounded ridiculously far in the future], so I started paying into a scheme accordingly. Over time, I increased my contributions appropriately. Some years later, I ended up with a couple of other pension plans in place too. I just went along with all of this and did not pay a lot of attention over the years. Recently, I have been discussing my finances with a new advisor to make sure that everything is optimal. He told me that my 1986 pension was looking like a very good investment, as long as I did the right things.
It turns out that this pension included a “guaranteed annuity” – i.e. the amount that it would pay out was fixed. It seems that this would not be available nowadays, but, back in the 1980s, the finance companies were much more optimistic and, hence, generous. The only catch was that I needed to close down this pension and start to draw on it on/by my 60th birthday [which is a couple of weeks away], otherwise I would lose the guarantee. Notwithstanding my natural aversion to filling in forms, I took the necessary action. As a result, in a few weeks, they will stop taking money from me and start paying back – for the rest of my life.
There were some decisions to be made, even if accepting the guaranteed payment was a no-brainer. [I will be getting an 8% return on pension “pot”, which is quite good by current standards.] Broadly I needed to choose:
1. Do I just take the money [pay tax on it] and invest it somewhere?
2. Do I take a tax-free lump sum and accept the income from the remainder?
3. Do I just accept the bigger income from the whole pot?
(1) was easy to reject, as I would be throwing away my valuable guarantee. I also rejected (2), as I have some savings, so there is no immediate use for the lump sum. So that left (3). All I needed to decide was whether I wanted a monthly or annual payment. The other thing, that I needed to consider, is what I do with the income. As I am continuing to work, for the time being, at least, I earn quite enough for my living expenses. So I will invest an equivalent sum to my pension income into another pension, as this has some good tax advantages. Sometime in coming few years, I will actually retire [at least from full-time employment] and need to look at these matters again.
It is a curious thought to be considering a matter that will be in effect for literally the rest of my life. I have taken a bet on how long I will live – I think that I need to get to my early 70s for it to have been a “win”. The pension company are betting on how soon I will die. Maybe I should have told them that I am an over-weight alcoholic, with a 40-a-day smoking habit and a penchant for dangerous sports – they would have paid me more.
OK, I am not strictly a “pensioner”, as this is not my primary income yet. But I do think that “The Future” may have arrived …