Time to wise up

Unless you’re one of the lucky ones, the retirement you face may be anything but the one you imagined and deserved.

Image: Ollie realised that there was little point getting older and not getting wiser

With things only set to get worse as we move forward what can you do to improve your financial returns in retirement?

More potential retirees will be working longer than originally planned but delaying retirement doesn't have to be as disastrous as it seems. By working longer and putting off taking benefits from your pension, it should provide a higher level of income when you eventually start drawing it. What's more, if you continue to pay contributions into your pension fund during these extra working years, you could significantly boost the value of your scheme.

If like many your pension is heavily invested in the stock market, its value has probably dropped off significantly. Although no one knows what's going to happen to share prices in the future most experts believe that they will begin to climb; a strong argument for delaying retirement to allow the value of your pension to recover.

The annuity option is also taken by many in retirement, with the annuity rates paid obviously higher for older people to compensate for paying out income over a shorter period. As well as your age, annuity rates are also based on prevailing interest rates and the yields on gilts and corporate bonds. As we could be in for a period of higher inflation and interest rates, holding off before buying an annuity may be to your advantage if annuity rates rise.

It makes sense to think about deferring your basic state pension too. You can take the missed income as a cash lump sum (plus interest of at least 2% above the base rate), or as a higher weekly income later on which is based on how long you wait before claiming your pension.

Pensioners are entitled to a range of financial assistance, from certain tax allowances and welfare benefits, to energy costs, all of which are not being claimed by enough people. Those not expecting a full basic State Pension are able to improve their State Pension by paying up to six years of voluntary National Insurance contributions for years going back to 1975. Consideration can also be given to an equity release mortgage, which can boost incomes. Although it will also eat into the inheritance you can leave to your children, Are there any measures that could be introduced to alleviate the pension crisis? Perhaps unspent pension pots could be left to any heirs on the proviso that the pot could only be used to fund a pension, at least that way retirement provision would be continually improved, with both personal and public finances benefiting.

The choice for many is clear; retire and have very little money and a glum existence, or work part-time and have a better lifestyle. As the gap between public and private sector provision grows, a form of pension apartheid is upon us. Things will remain tough for pensioners for a while to come, but hopefully I have shown there are ways to combat this. If MPs and Sir Fred Goodwin can both bow to pressure and relax their pension demands anything is possible!

Lee Tillcock, Editor of Moneyfacts.