There has been a good deal of debate recently about the subject of retirement benefit options.
In particular the media has focused on the subject of annuity purchase and whether or not consumers have been mis-sold or mis-purchased annuity plans.
I have been mapping out all the relevant points that a consumer needs to consider on this subject and have concluded that the choices and options are simply so complex that advice is an absolute requirement for anyone converting their pension plans into tax free cash and income benefits.
Of course I would say that wouldn’t I? After all Informed Choice makes money by charging our clients for such advice.
But take a look at what follows and the judge for yourself because this is not a simple set of decisions;
If you have a number of pension plans before you transfer any of them to a replacement plan in order to take benefits you need to know;
* if there are any exit penalties (costs) involved. Sometimes the quoted value of your plan and the “transfer value” is different and you may pay a significant amount to move your plan;
* does your plan contain a guaranteed annuity rate high than those available in the open market? If it does transferring could result in a lower future pension amount;
* if you don’t intend to buy an annuity but use “income drawdown” does your existing plan offer this facility, if it does it may be cheaper and better to stick with your current provider.
Are you going to take any tax free cash lump sum available to you? Usually this is 25% of the value of the fund but in some circumstances can be higher. One client I met with last week has an entitlement to 32% tax free cash.
You may also consider it prudent to spend the tax free cash lump sum over a number of years as if it were tax free income.
Not only might this reduce your overall income tax liability it also provides a good investment target.
If you spend the tax free cash as income over say 5 years you could aim to make your remaining pension fund grow to replace the tax free cash taken and spent.
Should you take benefits now or defer them into the future? Is annuity purchase the right option for you or is income drawdown more suitable?
And what about “phasing” benefit purchase over a number of years if you don’t actually need all of the benefits now?
What about a combination of approaches combining an annuity, perhaps a temporary annuity that only pays for a fixed period of say 5 years, with an invested income drawdown fund?
If you do decide to purchase an annuity are you entitled to a special higher rate because you are a smoker or have a poor medical history?
Should you make provision for the annuity income to continue to be paid to a surviving spouse or make other arrangements in the event of your death?
Should you choose a level annuity payment, one where the payment never increases, or start with a smaller annuity income that increases, or escalates in the future perhaps at a fixed rate of say 3% or increases in line with inflation?
Do you want your annuity income payments to start immediately (known as “in advance”) or can you defer receiving them for a while (in arrears) and how frequently do you want to receive those payments, monthly, quarterly, half-yearly or yearly?
And what if you “die too soon”; do you want at least some of the value of your pension plan to be paid to your survivors? If you do you can choose an early death guarantee that sees the annuity income paid out for perhaps 5 or 10 years.
And do you want a conventional “guaranteed annuity” or one where future levels of income payable to you are linked to investment returns?
If you have been convinced by the media that annuities are “poor value for money” then you may be exploring the income drawdown alternative.
If that is the case do you understand how the income from these arrangements are calculated by reference to GAD rates and that income can very well be different in the future and is not guaranteed?
Do you also understand that you will need to continue to invest your pension plan and that there are both costs and risks associated with doing this?
Making the right choice at retirement is complex and if you get it wrong it can have a significantly bad impact upon your financial future.
Some will argue that all you need is information and guidance and there may well be a minority of people who can do it themselves.
In reality impartial, independent and professional advice is well worth paying for when it comes to making these important decisions.
