Turning your pension fund into an income for the rest of your life is a really important financial decision. Choosing the right solution determines your monthly income for perhaps 30 or more years, and it could effect your spouse after you die.
Normally you have just one chance to get it right and with recent falls in stockmarkets around the world, maximising income has become an even more important issue. Despite all this, there is a process that is still poorly understood.
Retirement really shouldn’t come as a surprise, but too many people leave it far too late, far too close to their retirement date, before they start detailed financial planning.
Legal & General have stated that sending out information packs four to six months before a planned retirement date is too late. They suggest people need to have a year or eighteen months to start thinking through all their pension options.
The really important point. You don’t have to take the annuity offered by the company you saved your pension fund with. You should use the open market option and shop around for a better deal, for the best annuity rates. Depending on your personal circumstances, this can buy a annuity income 10% to 30% higher. Possibly more if you qualify for enhanced annuity rates because of ill health or if you are a regular smoker.
Probably around £50m of annuity income each year is lost by retirees who do not find the best annuity rate for their retirement income.
Still only a minority of pension savers switch their fund using the open market option, not least because some pension companies out there fail to explain the option properly.
Six months ago, almost 40% of insurers failed minimum expected standards in explaining the open market option to their customers, according to the Financial Services Authority (FSA). Now they have been told they have until the end of this month to improve their administrative procedures.
Really, the open market option should be the default option at retirement as it really does maximise investors’ annuity income and gives them the widest choice.
Most retirees use their pension fund to buy a level annuity, an income which is fixed for life. Level annuities might give you the biggest income from day one, but do not allow for inflation. The alternative is an escalating annuity that pays a growing annual income, such as an inflation proof annuity linked to the Retail Prices Index.
Sadly, whilst the theory of shopping around for the best annuity rates is great, the practice that is experienced by too many ofeten means a nightmare of paperwork and delays. The FSA reported delays in 60% of the cases it looked into last year. In four out of ten this was due to insurance companies delaying release of a pension fund to send across to the new annuity provider.
The Association of British Insurers (ABI) says the industry is trying to improve matters. It has signed up 16 insurers to a planned electronic system to manage setting up pension annuities. This will cut the paperwork and the aim is to have annuities up and running within 30 days of the new provider receiving a request. All 16 insurers should be using the system by the end of March this year.
