“THE pension landscape has changed unrecognisably over the last number of years, and the real risks now lie in inaction”.
These were the words of a legal expert from an international law firm, at a recent pensions conference in London.
The inaction she was referring to is the failure of pension companies to make savers aware of the choices they have at retirement.
Some of the choices are relatively new, some are relatively old.
But pension companies have never been the best at telling us the options we have with our own savings. For advice, they would quite rightly say, you talk to a financial adviser.
Here are a few reasons why.
On retirement, you may decide to buy an annuity, to turn your savings into a guaranteed income for life.
Your pension company will be first to tell you about their annuity products, in the hope that you give your business to them.
However, what they may not tell you is that you can shop around to get a better rate – which would mean more money every month.
It’s called your ‘open market option’ and is designed to help you get the best deal.
Fidelity have told us that there can be up to 30 per cent of a difference between the best and the worst deals on the market, at any given time. Shopping around is crucial.
Another way to get a better deal for yourself is to consider your health and your lifestyle. Again, pension companies have been criticised for not communicating this to their customers.
There are two types of annuity that will pay out more than the standard annuity, if you are eligible.
For instance, you could get an enhanced annuity if you are a smoker, or have other lifestyle habits that could be expected to shorten your life.
You are offered a better rate, compared to a healthy person of your age, because you are likely to draw your pension for fewer years, as your smoking or lifestyle will impinge on your longevity.
There is also an ‘impaired annuity’. You may be eligible for this if you are seriously ill, and it would give you a much better payout.
Then there are the more recent rules about what you can do with your pension savings.
You can now, for instance, draw down a portion of your pension savings as an ‘UFPLS’.
This stands for ‘uncrystallised funds pension lump sum’, and explains why so few pension experts are poets.
This is an option that has been possible since the new pensions rules were introduced in April 2015.
It means that you can take all of your pension, or just some of it, as a lump sum, of which the first 25 per cent is tax-free and the remainder is taxable.
Now, for tax reasons you would probably be wise to have the guidance of a qualified financial adviser, before reaching into the shopping basket of new financial changes.
There are many options now, but that also means many ways to make the wrong choice.
More than ever before, it pays to take financial advice.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005
