Earlier this week Channel 4’s Dispatches program looked into retirement and asked:
“What’s your pension really worth?”
The program featured many of the great and the good from the pensions industry as well as a a brief interview with Steve Webb, the Pensions Minister. It focused on four main areas:
- How much you need to pay into your pension
- Annuities and the options available at retirement
- The perils of ‘pension liberation’
- Is property a better option than a pension?
But in half an hour (less the ads) what did the program teach you if you are close to retirement and need to convert your pension pot into an income?
Lesson #1: An Annuity isn’t the only option
Too many people think an Annuity is their only option for turning a pension pot into an income. It isn’t!
For many people, who want a guaranteed income for life, an Annuity is the right option. But, it brings with it other risks, especially if you die sooner than expected, buy a level Annuity which inflation will erode or you become ill in later years and would have qualified for an Enhanced Annuity.
You can never change an Annuity. At the very least you should consider all the other options before you sign on the dotted line and commit yourself for the next 20 or 30 years.
Lesson #2: Think ahead
Ok, so you’ve decided, or been advised, that an Annuity is right for you.
You now need to decide on the right shape of your Annuity. This means making decisions about a spouse’s pension, guarantee periods, indexation and so on.
But you’ve got to think ahead, how will your partner survive financially if you die before they do and you’ve bought a single life Annuity with no spouse’s pension?
The Dispatches programme featured a widow, whose husband bought a single life Annuity, leaving her financially exposed when he died.
The temptation is to avoid adding options, as each one will reduce the starting income you get. But you will be retired for many years and the decisions you take now, particularly in relation to a spouse’s pension, will need to work now and in 10, 20 or even 30 years’ time.
Lesson #3: Read the small print
The widow, who was left without an income when her husband’s pension stopped after his death, was adamant he wouldn’t have bought a single life Annuity if he’d have known of the implications.
Annuity illustrations can be confusing, with vitally important facts often lost in a fog of clauses, conditions, and the jargon the pension industry so loves to use.
But, until these illustrations are made easier to read, it’s vital anyone buying an Annuity reads the small print carefully.
It’s also worth getting your partner to read the documents too, they may well spot something you’ve missed; two heads are better than one!
Lesson #4: Take advice
There are three ways you can buy an Annuity:
- Direct from an Annuity provider
- From a ‘non-advised’ Annuity broker
- From a financial adviser who will provide you with advice
Talking to an adviser will mean you get advice on the best option for you, which might not even be an Annuity. If it is, you will also get advice on the right type of Annuity, which options you should include, whether you qualify for an Enhanced Annuity and who will offer you the best rate.
Sure, an adviser has to be paid a fee for their work, but going direct or using a ‘non-advised’ broker isn’t a free ride, you will still be charged a commission of up to 3.5% of the purchase price of the Annuity.
What do you get for that? It certainly isn’t advice!
Lesson #5: You’ve got one chance to get the right Annuity
We’ve already said that an Annuity can never be changed.
Making a bad choice, for example by not including a guarantee period or a spouse’s pension, could cause financial hardship for your dependents.
Take your time, take care and take advice, it’s the best way of getting this crucial decision right.