BBC Breakfast on Saturday 21st June featured a piece on the importance of shopping around to ensure that you get the highest possible income when you retire.
This applies to those of you with private investment linked pensions. These operate on the basis that you make contributions during your working life to create a pot which you use to support yourself in retirement. At that point, you can typically take 25% as a tax free cash sum and the rest must be used to provide an income in one of a variety of ways. For most people of relatively modest means the most appropriate option is likely to be an annuity.
Annuities come in all sorts of shapes and sizes. They can be paid monthly, quarterly, half yearly and yearly, in advance or arrears. Payments in arrears tend to be greater than in advance. For example a pension yearly in arrears will be better than a pension monthly in advance. They can be level or escalating and can include various levels of provision for spouses and dependents. They can also include a degree of capital protection so that the fund is not all lost should you die shortly after retiring. Enhanced annuity rates are available to smokers as well as to people in poor health.
A key aspect of annuities is that once you have made your choice and the annuity has been put into force, you cannot change your mind. It is therefore critically important that you carefully consider your requirements – and those of your dependents- before you commit yourself. If you suspect that your health may qualify you for a better rate check out enhanced rates.
The Financial Services Authority, the body which regulates the financial services industry, has produced a useful booklet which summarises your choices on retirement. You can access it here
The thrust of the BBC piece was that a large number of people do not appreciate that when they retire they do not need to buy an annuity from the company with which they built up the pension fund. All pension providers are required to offer what is known as the ‘Open Market Option’, which is the facility to take the fund to another company where an improved annuity can be provided. As a consequence they are losing a substantial amount of money.
The importance of checking out the Open Market Option cannot be overstated. Most pension companies do not offer good annuity rates. Prior to retirement they issue a pack of information containing a range of options and this will mention the open market option. However too many people ignore this to their cost.
So how do you find out more about the Open Market Option? See an independent financial adviser. They will not only be able to shop around for you but they will also be able to advise you on which on the other benefits you should include such as a spouses/dependents pension, escalation etc. They will also be able to liaise with the various companies involved to ensure that your pension comes into payment with a minimum of delay.
As a practitioner I can assure you that this is not merely a theoretical exercise. Barely a month goes by when I don’t help someone shop around for the best rates. Most recently this has resulted in a pensioner increasing their income by some £3000 per year.
Chris Wicks CFP
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