Is a pension decision final?

Waiting can feel like the one safe option when a pension decision looks too big to make. Here's what it actually costs.

Somewhere in your house there is probably a pension pack you haven't opened. It came from your pension provider, and it sets out what you could do with your money when you retire. You meant to look at it, then something else came up, and a year went by.

If that sounds familiar, you're in very ordinary company.

In July the Department for Work and Pensions published research into how people approaching retirement make these decisions. It was based on interviews with 55 people aged between 53 and 67. What it found wasn't indifference. People knew the decision mattered, and they put it off anyway.

The reasons they gave were human ones. The choices felt complicated, and there was real worry about making a financial mistake with money that had taken a working life to build. Some described waiting until circumstances forced their hand.

Laziness has little to do with it. Most of us behave the same way when a decision feels large and permanent, and nobody has explained the options in a way that makes sense.

Why waiting feels safe

Waiting has real logic behind it, and it's worth saying so plainly. If you don't make a decision, you can't make the wrong one. Nothing has been signed, and the money is still sitting there.

Some of these choices are also genuinely hard to undo. Buy a lifetime annuity and you have bought it for good, which is a reasonable thing to be careful about.

But waiting isn't quite the neutral position it appears to be. Your pension doesn't sit still while you think about it, and neither does the income you would have been drawing had you decided. Both of those are moving whether you engage with them or not.

Sometimes waiting does pay

Annuity income has risen this year, which complicates the argument, and it would be dishonest to skip past it.

The figures come from Moneyfacts, which tracks the market. At the start of March, a 65-year-old with £50,000 could buy an annuity paying £3,547 a year for life. By the start of August, the same £50,000 bought £3,653 a year. Both figures are for a standard annuity that pays a flat income and leaves nothing to a partner.

Someone who happened to wait those five months got an income £106 a year higher than the one they would have bought in March, for as long as they live.

So waiting is not always the expensive option.

But look at what that example can't tell you. It can't tell you what happens next. Annuity rates move with forces well outside anyone's control, and nobody can say in advance which way they will go. The person who gained that £106 didn't earn it by being shrewd. That was luck, not judgement.

The rate isn't the only thing moving

The rate is only half the picture.

Go back to that five-month wait. Whoever bought in March started being paid in March. By the beginning of August they had received around £1,478 of income. Whoever waited received nothing in that time, and no future rate rise gives it back.

So the trade is about £1,478 now against £106 a year afterwards. Do the sum and the wait takes almost 14 years to repay. Buy at 65 and you are 79 before it has paid for itself.

The useful part is that this barely shifts with the size of your pot. A larger pot means more income forgone, but it also means a larger annual gain, and the two rise together. At £50,000 or at £120,000, the wait still takes about 14 years to earn back.

Forgone income is the part a rate comparison never shows you. A better rate arrives slowly, in small annual instalments, while the income you skipped is immediate and gone in full.

This was one five-month window, and the sum leaves out what your pot was doing while you waited. But the shape holds. Waiting costs you the income you would otherwise have been paid. Whether it buys anything in return is the part nobody can know in advance.

What your waiting is buying

So the real question isn't when the rate will be at its best, because you can't know that and neither can anyone else.

The question worth asking is what your waiting is buying you.

Waiting to understand the options buys you something real. The permanence that makes these choices frightening is the same reason they deserve time, so working out which one fits your circumstances is doing real work. Signing for a lifetime income you don't understand isn't really a decision at all.

Waiting because the whole thing feels too big buys you nothing. The choice doesn't get easier for being left alone, it just gets made later, and often under more pressure than you would have chosen. That is close to what the people in the government's research described.

From the outside those two delays look identical. They are not remotely the same thing.

What makes the decision easier

Most of what keeps people stuck isn't the arithmetic. It's the feeling that looking into it means committing to something, and that once you start you'll be carried along.

You won't.

It helps to know there is more than one route. A lifetime annuity, a fixed-term annuity and flexi-access drawdown do quite different things, and the flexible one leaves your money invested, where it can fall as well as rise. Which of them suits you depends on your own circumstances. There's no single right answer that applies to everyone.

Nor do you have to accept the first number you're shown. Comparing quotes across the whole market, sometimes called the Open Market Option, is something you're entitled to do. Rates vary between providers, and the range is easy enough to see for yourself.

And looking is not the same as buying. Pense compares the whole annuity and drawdown market on your behalf, and the service is free until you decide to go ahead. Its recommendations can include doing nothing at all.

Deciding isn't the same as rushing

None of this is an argument for hurrying. Hurrying is how people end up with something that doesn't fit, and these choices are hard to unpick afterwards.

The argument is for making the choice on purpose, rather than letting it get made for you by a date on a letter, or by whatever your circumstances happen to look like in three years' time.

Making it on purpose doesn't have to start with a phone call or a signature. It can start with the pack you still haven't opened, and an hour on a wet afternoon.