PartnershipUnless we see a dramatic U-turn, pensioners will soon have unprecedented access to their pension.

But that has led to a dilemma for anyone retiring before April 2015; how can you create an income now, whilst leaving your options open next year?

There are already a few alternatives:

Now there is another option, Partnership’s Enhanced Choice Annuity.

So how does it work? Is it a viable alternative? Does it get the thumbs up from us?

Retiring soon? Our advisers can help you make the right decisions

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How does it work?

A Lifetime Annuity is normally a ‘once and done’ decision. To put it another way, there’s no changing your mind. But new Partnership’s Enhanced Choice Annuity gives you a ‘get out’ option on the first anniversary.

Here’s how it works:

  • The Enhanced Choice Annuity is bought with your pension fund
  • If you suffer from ill-health or there are lifestyle factors which mean you qualify for an Enhanced Annuity these will still apply
  • The income is paid as normal until the first anniversary, when you are offered two choices
  • You could decide to continue with the Annuity, with no further changes allowed
  • You could take the ‘Cash In Option,’ which will allow you buy an alternative retirement income product, perhaps something new to the market/ Alternatively you could take whole fund as a lump sum, which will be taxed

Essentially the plan is designed to give you the best of both worlds; an income for the rest of your life and an option to change your mind at the first anniversary, if a better retirement income product becomes available, or you simply want the lump sum.
But, there are two catches.

Firstly, if you buy an Enhanced Choice Annuity, your annual income will be lower than if you buy a normal Annuity.
Secondly, the amount of money you would get under the ‘Cash In Option’ is significantly lower than the original fund.

So what do the numbers look like?

We’ve run some figures, comparing the income provided by the two options:

 

Traditional Partnership AnnuityEnhanced Choice AnnuityReductionCash in opt
Single Life£6,938.52£6,780.36 per annum-£158.16£89,696.65
Joint Life50% spouse's pension£6,291.36 per annum-£144,48£90,289.99
Joint Life66.67% spouse's pension£6,094.80-£140.04£90,474.69
Joint Life 100% spouse's pension£5,736.84-£131.76£90,881.32

These figures include an enhancement for ill-health and assume a pension fund of £100,000, a five year guarantee and the income will remain level paid monthly in arrears

The price of flexibility is clear:

  • An annual reduction of 2.3%. This might not sound a lot, but over an average life expectancy will amount to thousands of pounds
  • The amount offered under the ‘Cash In Option’ is around £4,000 below the original fund value, after taking into account the years income which will have been paid

What are the alternatives?

If you need income now, but want flexibility to take advantage of the new rules and new products next year, then, as we noted earlier, you have three main options:

We’ve already given our views on the one-year Fixed Term Annuity; we believe a SIPP and deposit account combination provides a better alternative. You can read the full article here.

Deferral, whilst creating income from other sources, for example savings or investments, is a useful fourth alternative and is often overlooked.

This option has a number of key advantages:

  • You can defer decisions until after April next year, when the new rules will have been finalised and new products may have been launched
  • Your pension pot can remain invested
  • Because you have not taken benefits from your pension, the whole fund would be paid out as a tax-free lump sum if you were to die unexpectedly during the next year
  • Advice fees will potentially be lower

Are there any advantages to the Partnership Enhanced Choice Annuity?

Possibly a couple.

Firstly, there is growing concern Annuity rates will drop over the coming months, as a result of people taking their pension pot as a lump sum. If this happens tying in to today’s Annuity rates could be attractive.

Secondly, despite the lower on-going income and reduced value if you exercise the ‘Cash In Option,’ the plan does give you the ability to change your mind in a years’ time, if you think you have made a poor choice or prefer an alternative product.

Thumbs up or thumbs down?

Although we applaud the innovative approach Partnership are taking and we hope they continue to develop new products, we just don’t feel this product hits the mark.

Clearly everyone’s circumstances are different, but we don’t believe the Partnership Enhanced Choice Annuity will be right for many people:

  • In our view the cost of the increased flexibility is just too great
  • We are also worried that people will end up worse off year on year, just to have access to a ‘Cash In Option’, which they may not use
  • Some advisers and brokers could use this ‘Cash In Option’ as a way of charging their clients twice; once to set up the product and again at the first anniversary
  • Any new product bought after exercising the ‘Cash In Option’ is unlikely to produce a better income than the existing Annuity
  • April 2015 is now only 10 months away, most people would therefore be better off creating income from alternative sources and making decisions next year when things are clearer

Confused? We’re here to help

Our team of Independent Financial Advisers are experienced in developing retirement income strategies for clients the length and breadth of the UK.

If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk

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