Unscrambling the uncertainties of that pensions annuity
IT'S very hard to unscramble an egg! The egg got scrambled in 2015, when we were given much more choice in how to access our pension savings, but for people approaching retirement, the result since has been confusion and uncertainty about how best to access our money.
Many people's heads were, and still are, scrambled, unless they sought the expertise of a financial adviser. In our experience, one of the greatest challenges our clients face in their financial life comes at the end of their working life.
In previous decades, choices were much more limited, but that also meant relatively simpler.
There used to be a legal requirement to convert your pension savings into a pensions annuity, the policy that guarantees you a fixed monthly income for life. You had no choice to make, other than shopping around for the best deal, but once that was done, you had the security of knowing how much was coming in at the end of the month, every month.
An annuity is a great financial product. First, it is not linked to or affected by the turbulence of the stock markets, as savings in an investment fund could be; it is also unaffected by changes in the Bank of England base rate of interest, as savings in a bank could be.
On the other hand, an annuity is inflexible, and once you have entered the contract, there's no going back – you have made a choice that is irreversible. However, many people are happy to have that guaranteed and reliable income.
These days, as you approach retirement, you have many more options than you used to have - which brings us to our subject this week: pensions drawdown.
This is the main new freedom we have had since 2015. We are no longer compelled to buy an annuity (although we still can if we wish), and we have the flexibility to take out or ‘draw down' sums from our pension savings, when we finally put our feet up for a rest after a long working life.
There is, of course, one small problem. We have no idea how long we are going to live, and so it is difficult to know how quickly and how much of our savings we can draw down, but still have enough to sustain until the end of our life.
The financial regulator (the Financial Conduct Authority or FCA) found in 2020 that, despite the new and complex rules, a third of people who opt for drawdown do so without financial advice.
That's not exactly like walking through a minefield without knowing where the mines are - but it's not far off.
They said that of those who do not seek professional advice, but act based on their half an hour's study at the University of Google, a third really damage their financial future. They end up with tax bills that would probably have been avoidable, or with a pension income that could have been a third higher.
A GP once told me that it takes seven years to become a doctor, but only 10 minutes for your receptionist to think she's one too. What I'm saying is: it's much wiser to talk to a trained professional. The internet is not the answer.
Unadvised people also tend not to be unaware of the costs of drawdown. The FCA said there were 44 different charges that are possible.
One sensible way chosen by many people is to put part of their pension savings into an annuity, so that they have some guaranteed income forever, to cover the ongoing bills, and then decide how to access the rest, and what to do with it.
Are you finding the new pension freedoms confusing? Give us a call, and let us make it clearer. We can't unscramble an egg - but we can unscramble your head!
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com