How to keep your retirement dreams on track #UKPensions #IN
08 Tuesday Oct 2013
Savers must tread incredibly carefully at retirement to avoid being exploited by pensions companies. Here, we guide you through the traps.
The worst thing you can do is to rush into buying the first rate you are offered when you take your pension. In fact, you may be best off shunning annuities altogether – at least for the time being.
The main alternative to annuities is something called “income drawdown”. Here, you keep your pension invested in the stock market while you take an income.
If you can prove that you have £20,000 of guaranteed annual pension income from other sources then you can withdraw as much as you like. This is called “flexible” drawdown. However, most people will see withdrawals subject to a cap. Currently, the amount a 65-year-old can take from a £100,000 pension pot each year is £7,320, according to pension provider LV=.
The cap is set according to the returns on government bonds – its purpose is to stop savers emptying their savings pots too quickly and falling back on the state in old age.
The cap is reviewed every month by the Government. However, savers can only change their income if they call a special income review with their adviser or drawdown provider. This can only be done once a year, on the anniversary of the last review. It must take place every three years by law – so your maximum withdrawals will rise or fall. However, you do not have to take the maximum.
The big risk with income drawdown is a stock market crash undoing years of saving. Unlike an annuity, which automatically locks in your previous gains, you must make careful investment choices. So it’s worth taking professional financial advice.
You can always buy an annuity later, should rates improve or the lifetime guarantee appeals more strongly. Drawdown gives your pot a chance to keep growing – take 5pc as income and achieve 5pc growth and your capital will remain in tact. Any money left in a drawdown pot at death can be passed to your estate, subject to a 55pc tax charge.
Get advice when choosing your annuity
Savers with less than £50,000 are often best sticking to annuities, according to drawdown expert Alastair Black at Standard Life. This is because of the risk that your savings could deplete to such a critical level that it is difficult to recover lost ground. Each saver’s circumstances will be different, though, and many with more than £50,000 will prefer the safety of an annuity.
The rates on offer from different insurers vary by as much as 30pc. This means some firms will pay an extra £1,444 a year from a £100,000 pension pot, compared with rival companies.
Last March the Association of British Insurers launched a “code of conduct” designed to help pension savers find the best deals. This includes giving clear information about the benefits of shopping around, and not issuing unsolicited quotes. However, the body is now investigating claims that its members are not operating in the spirit of these guidelines. Figures show 52pc of customers are still buying an annuity from their existing provider – exactly the same proportion as last year.
Always speak to a financial adviser or, at the very least, an annuity broker before buying an annuity. This particularly applies to people with medical conditions, who qualify for special “enhanced” rates worth as much as double a standard deal. The more health details you can disclose, the higher the rate. However, if you have a very short life expectancy, it is unlikely that you will get back your entire capital, so it may be better to go into drawdown.
Avoid annuity brokers that don’t get quotes from the whole market. Some have partnerships with insurers that excluded the top rates from any search. Others only offer basic medical screening that fails to account for the severity of your health conditions. Also check whether your existing insurer offers “guaranteed” annuity rates with your existing policy.
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