The ABI (Association of British Insurers) say that only 37% of people used their Open Market Option (OMO), or in other words two thirds of people who have saved hard to build up their pension do not shop around for the best Annuity.
Why is this the case?
Phillip Bray, the Marketing Manager here at Investment Sense thought he would take a look at six common myths surrounding the decisions you have to make at retirement
Myth 1: “It’s too complicated and will take up too much of my time it’s just not worth the effort”
It’s true, this is a complicated area and there are many choices to make, Lifetime Annuity, Enhanced Annuity, Fixed Term Annuity, Third Way Annuity, Unit Linked Annuity, With Profits Annuity, Income Drawdown, Phased Retirement – you get the picture!
However, make the wrong decision now and you could be locked into an unsuitable Annuity for the rest of your life. Imagine buying a Lifetime Annuity only to find out a couple of months later that you could have got a higher income from an Enhanced Annuity and that there is now nothing you can do to get that higher income, how infuriating would that be?
There is of course a simple solution, take advice, but advice costs I hear you say, indeed it does and we will look at some of the myths around advice shortly. However, only an Independent Financial Adviser can offer you the advice that you need at this crucial time, shop around, talk to a few, but whatever you do, take advice, you will not regret it.
Myth 2: “I’ve had my pension with them for years, they have done great for me, surely they must offer the best Annuity”
Unfortunately this is just not true.
Each pension provider or fund manager are specialists in their own area, whilst it is great that you are pleased with the performance of your pension, so many people are not, it is highly unlikely that your current pension provider will offer the best Annuity rate for you, a simple check on our Annuity Calculator, which can be found by clicking here, will prove this to you.
Taking this a little further, if you qualify for an Enhanced Annuity due to health or lifestyle considerations, it is even more unlikely that your current pension provider will offer the best Annuity rate, as the most competitive Enhanced Annuity providers do not even offer pensions.
Myth 3: “I’m better buying an Annuity without taking advice, the commission will make the IFA biased and will reduce the income I get”
This is probably the biggest myth when it comes to retirement planning and is best addressed by taking a step back.
It is true that you can get a lot of information from the internet including accurate quotes for Lifetime Annuities, however an IFA can add significant value to this.
At a very basic level they can often negotiate with the Annuity providers to get a better rate, they also have access to more detailed quotes systems when it comes to an Enhanced Annuity.
However in some respects that is putting the cart before the horse, the starting point in any conversation is to look at which generic option is right for you, whether it be Lifetime Annuity to Income Drawdown and anything in between. Only when you look at the advantages and disadvantages of each option, along with the income level associate with each, can you make an informed choice as to which route is best for you.
Clearly you will have to pay the IFA for his or her time and advice, and here at Investment Sense we offer two options.
Firstly the IFA could be paid via a commission from the provider recommended, typically an Annuity provider pays between 1% and 3%. When looking at larger cases we are happy to review the level of commission we receive and take a lower amount, meaning that you will benefit from a higher level of income.
The second way in which we could be paid is via a fee. This means that we will take no commission and rebate anything that we would have received into the Annuity meaning you get a higher level of income. We believe that many people could be put off paying a fee, worried by the fact that the fee could be higher than the commission, or if something goes wrong, run into many more hours of work than had previously been planned. To avoid this, we cap our fees at an agreed level before we start work, leaving you safe in the knowledge of exactly what the maximum fee could be.
Still not convinced? The final thought I would make on this point, and possibly the most important is simply this, we do not start to charge fees or agree to accept commissions until we have agreed with a client that they will implement our proposal. You can therefore work out very simply whether you think the improvement we have made to your level of retirement income, whether it be from a better Annuity rate or offering you alternative options you had not previously considered, is worthwhile.
Myth 4: “My pension is small, I have to buy an Annuity and it really isn’t worth shopping about for a fund my size”
It is true that certain options, such as Income Drawdown, are very unlikely to be suitable for a smaller pension fund. However, this certainly does not mean you should not shop about for the best Annuity rate.
Furthermore there are other options available to you rather than simply opting for a Lifetime Annuity, for example you may qualify for an Enhanced Annuity, or a Fixed Term Annuity may be more suitable to your circumstances.
In many respects having a smaller pension fund increases the need to shop about and take advice, you need the pot that you have created to be stretched as far as possible.
Myth 5: “My pension isn’t worth what I was told it would be, I really don’t trust anyone to give me the right advice”
After all the scandals associated with financial services over the past couple of decades, no one would blame you for thinking such a thing. However, persevere, the industry is changing.
This is demonstrated by initiatives such as the ‘Offer More Options’ campaign of which we are proud members, our commitment to offering you the option of paying for advice via commissions or fees, whichever suits you and our promise that you will not pay any fee or we will not receive any commission until you decide to proceed with our recommendation.
Myth 6: “I won’t qualify for an Enhanced Annuity”
If you are in the peak of health, don’t smoke, don’t drink and don’t take any medications then yes, you are probably right, you won’t qualify for an Enhanced Annuity.
However, if you have any issues, no matter how insignificant they are to you, they should be brought to our attention, you may well qualify for a higher rate of income. This could include slight issues with weight, raised blood pressure or cholesterol, or even that you were previously a smoker but have recently given up.
If you are applying for a joint life Annuity, don’t forget your spouse’s health, any issues affecting them will help increase the level of income.
In short, declare any health or lifestyle issues to us as soon as you start to discuss your options with us, we can then tell you if you will qualify for an Enhanced Annuity, you may very well be pleasantly surprised.