'I'll get my pension when I can afford to retire' is not the glib resigned response that it used to be. Or it shouldn't be, given the new flexibility on pension rules. Whether it's payable by the state or comes from a private fund, your pension does not have to be drawn only when you reach the traditional retirement age.

When the state gives

Under present rules the basic single state pension (£87.30 per week in 2007/8) is payable to women when they reach age 60; men have to soldier on for another five years until age 65. The government plans are that for women born on or after 6 April 1950 the state pension age will start to increase from April 2010, so that by 2020 men and women will have the same state pension age of 65 years. This is expected to rise further to 68 by 2046.

To qualify for the full basic state pension you must have paid National Insurance Contributions (NICs) for 90% of your working life, which is normally 44 years for men and 39 years for women. Proposed reforms set out in the 2006 Pensions Bill (yet to be ratified by statute) will mean that from April 2010 both men and women will need only 30 years of NICs to get the full state pension.

People with a NIC shortfall have the option to top up missing contributions, but only going back six years. To get a fix on your entitlement, fill out form BR19 (available on line at www.thepensionservice.gov.uk). This will reveal how much National Insurance you have already contributed and what level of state pension you can expect when you retire.

Unfortunately, they can't currently provide anyone who reaches state pension age on or after 6 April 2010, with a state pension forecast. This is because the computer systems used to provide state pension forecasts are in the process of being updated to reflect the changes to the rules introduced by the Pensions Act 2007 and the system changes aren't due to be in place until autumn 2008!

More money if you defer

Both men and women, whether still working or not, can defer their state pension for a maximum of five years (until age 70 and 65 respectively). If you are among the estimated 11% of those over official retirement age but still in a job and you can afford to wait for your state pension, the financial benefits are worth considering.

You can build up extra state pension at the rate of 1% of your normal weekly state pension for every five weeks you put off claiming. This is equivalent to almost 10.5% extra each year for life for every year you defer claiming.

The extra pension thus accrued is paid on top of your normal weekly state pension from when you start claiming it; it is increased each April in line with any increases to your state pension.

Alternatively you can take a cash lump sum, payable at the end of your deferment period, which has attracted a guaranteed interest rate of two percentage points above Bank of England base rate.

To get the cash lump sum (taxable at the highest tax rate applying to your other income) you must defer your state pension for at least a year. The sum will not pass to your estate should you die prematurely. Also, opting by deferment for a cash lump sum or increased state pension income could reduce your entitlement to various allowances such as incapacity benefit.

Private pension options

In 2010 the minimum age at which you can start drawing on a private pension, be it a personal, self-invested personal pension (SIPP), or company scheme, rises from the current 50 years to 55. There is no compulsion to take out an annuity at either of these ages; also, you are free to decide whether you want to take up to a 25% tax-free cash lump sum from your pension pot.

Age, sex and, in certain cases, health all determine the amount of annuity that is paid and although there are various types of annuity on the market, there is but one golden rule: shop around for the best deal. Insurance companies vary significantly in their annuity rates; you don't have to buy from the one you saved your pension with.

Remember too that if you're a smoker, overweight, suffer high blood pressure, heart disease or cancer you could qualify for an impaired life annuity which enhances the payout by in the region of 25% to 50%. Swiss Re research shows that 40% of the some 355,000 who buy an annuity each year could qualify for an impaired rate once their medical history is taken into account, yet fewer than 20,000 do so.

Once it's bought, you're committed to that annuity so, if you can afford it, it may make sense to carry on with contributions to your pension pot until age 75, when purchasing an annuity becomes obligatory (although even then there's a limited alternative). If you are no longer earning your annual pension contributions are limited to the current stakeholder level of £3,600 including tax relief.

If you do need an income then there is the unsecured pension (USP) arrangement. Formerly known as income drawdown this provides the option to take tax-free cash and an income from your pension fund but defer annuity purchase until age 75.

Since the pension reforms came into effect it is possible for anyone with a USP to draw down each year a maximum amount roughly equal to 120% of what they have got from an annuity.

There are risks though. The pension fund remains invested in the stock market so the income you take should not exceed the fund's investment growth. Also annuity rates might fall rather than rise in the future so there is no certainty of getting a better annuity rate in the future. And the higher charges associated with USPs only really make them suitable when you have a large pension pot, probably well in excess of £100,000.

At age 75 your options basically disappear. You must convert your pension fund into an annuity and consequently risk bequeathing your lifetime retirement savings to an insurance company (how long do you expect to live?).

There was (and still is) a facility which allows conversion into an alternatively secured pension (ASP) which may be kept invested and, unlike an annuity, passed on to your heirs. However, a minimum level of income must be taken, and the tax charge for passing on tax-favoured pension savings is now punitive (up to 82%) unless you leave the ASP to a surviving dependant or to charity.

The information in this article is intended only for information purposes and not as advice on your own situation because it may not be appropriate for you. If you are unsure whether something is suitable for you then you should seek advice from a relevant professional.

 

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