Business

The more things change, the more they stay the same

New rules around pensions came into force at Easter, but what difference did it make?
New rules around pensions came into force at Easter, but what difference did it make? New rules around pensions came into force at Easter, but what difference did it make?

THE French proverb springs to mind again this week, at a time when the dust is still settling from a recent upheaval in the pensions business, but also at a time when unsatisfactory sales practices of some pension companies are still, unfortunately, just as they were.

First of all, let’s sum up again what has changed.

On April 6 (which was Easter Monday) rules came in which gave pension savers substantial new freedoms to do what they like with their pension savings.

Under these new pensions rules, you can take out some of your pension, or even all of it, as a lump sum, of which the first 25 per cent is tax-free, and the remainder is taxable.

With no obligation these days to buy a pensions annuity to turn your pension into a regular income, you are entitled to do whatever you like with your savings. Not surprisingly, the demand for annuities has fallen as a result – by 16 per cent in the past year, according to the Association of British Insurers (ABI).

Nonetheless, there are still many who do prefer the predictability and security of income that an annuity provides.

That, in a nutshell, is what has changed, marking 2015 as the dawn of a new era in pension saving and retirement planning.

As regular readers will know, I do like to drop the occasional sparkle of culture into this esteemed column, and the words of the great poet William Butler Yeats are appropriate to describe this situation: ‘A terrible beauty is born.’

What I mean is that with these new freedoms comes considerable confusion, and new challenges for savers.

It is a ‘terrible beauty’ where, perhaps more than ever, consumers are in need of quality advice and guidance to ensure that they deal well with their new responsibilities (to themselves!) and, with such unlimited access to their pension, make sensible decisions.

Which brings us to the second part of my French proverb above, hinting that some things haven’t changed - they have remained the same.

The Financial Ombudsman’s Service – which is the industry watchdog dealing with complaints by the public in relation to financial services – has noted a sharp increase of nearly a third (29%) in complaints about annuities selling in the past year.

There were 776 complaints in the year to the end of March 2015, compared to 601 the previous year.

The bulk of these arose out of a particular failing on the part of pension providers, which has been something of a thorny issue for a good while.

When a customer wishes to buy an annuity, many pension companies offer their own annuity, but fail to inform the customer that they have a right to shop around for a better deal.

The FOS says that many more customers among the above complainants had contacted them because they purchased their annuity without having been told of this right to shop around - which is known as your Open Market Option.

You can see why they might be annoyed: having an independent financial adviser do some shopping around for you can add 20 per cent or more to your monthly income in retirement.

In other complaints to the FOS, customers had not been told about the availability of a special type of annuity known as an ‘enhanced annuity’.

You may be eligible for an enhanced annuity if you are a smoker, or have other lifestyle habits that could be expected to shorten your life.

The reasoning is simple: you are offered a better rate (which equals a higher monthly income than a healthy person of your age) on the basis that you are likely to draw your pension for fewer years, as your smoking or lifestyle will impinge on your longevity.

The enhanced annuity is, in that sense, an almost unique financial product, where a bad lifestyle can actually benefit you, financially speaking.

There is also an ‘impaired annuity’, for those who are already seriously ill, which will also give you a much better payout from your annuity.

The FOS figures follow hot on the tail of a statement in March by the Financial Conduct Authority (FCA). They were also concerned about companies providing details only of products that they offer, so that consumers are left in the dark about better deals that could have been available elsewhere.

Yet again, the message from both bodies is clear: consulting an independent financial adviser is the sensible approach to take, if you do decide to purchase an annuity, or re-invest your pension savings.

:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 7188 6005.