Price of late retirement

June 2005

We’re supposed to be taking a more flexible attitude to retirement, including working longer to give ourselves a decent pension. But the word ‘flexibility’ has not entered the vocabulary of some of the insurance companies who run personal pension schemes.

In fact, if you shift your retirement date back a few years, several of the biggest pension firms can slap a huge penalty on your savings. In some cases, they could cut your pension by up to a quarter.

How can they do this? Once again the detected market value reduction (MVR) exit penalties are being used. These penalties, which are supposed to be applied to reflect severe stock market falls, are also used on those who want to take their money away early.

When you start a personal pension, a retirement date is written into the contract. If you decide to retire at a different date, the company can impose MVR penalties.

Many companies have the right to hit some of their savers with MVRs if they delay their retirements. Pensions savers with these companies have a small window often just two or three weeks after their original retirement date – in which to take their savings and but an annuity for a lifetime income.

If savers miss the date and do not arrange a new one, the insurance company can set one for them. If they do not stick with this new date, which is often five years later, they face a penalty when they take their money.

This takes no account of savers’ changing needs over their working lives, and underlines how inflexible many pension plans are.

With-profits companies attempt to justify MVRs by arguing that pensions plans work around set dates and that it could cost extra to let savers get out MVR-free. However, Michelle Swain, consultant at Independent Financial Adviser (the annuity bureau), rejects this. She says: “You have fulfilled your contractual obligations by your retirement date. I think it is profiteering.”

To avoid an MVR, contact your insurer before you retire and, if you want to delay, arrange for a new retirement date that will let you out penalty free. Alternatively, you can switch your money out into another, safer investment such as a cash-based pension fund on your MVR-free date.