Monthly Archives: December 2011

Retirement income cut

The future for your retirement income isn’t looking good if you’re considering retiring in the next few months or so. Many experts are suggesting a that a 3 pronged attack on pensions will have the effect of drastically cutting retirement income. The effect of falling pension annuity rates, volatile stockmarkets around the world and pension contributions being frozen or falling has created many problems for retirement incomes – which means that anyone still working now could get a significantly smaller retirement income when they come to retire.

Falling income from pension annuities means that an individual with a £200,000 pension fund retiring at 65 would get an income from a pension annuity of about £5,800 each and every year – in 2009 it would have been closer to (a hefty) £7,000, quite a difference, I’m sure you’ll agree. Mercer says that to retire on the same retirement income someone was projected to receive back in 2009 (only 2 years ago) might now mean working for an extra three years or more today.

As well as pension annuity rates, employees are paying in lower contributions to their pensions and employers have left their contributions unchanged since 2009. For the average money purchase (or defined contribution) pension scheme – the sort of pension most people working in the private sector have – employees now pay in around 4.2% of their salary, down from about 4.6% back in 2009 and employers’ contributions are still at 7.2%.

It is likely that employer contributions into pension schemes will actually rise over the longer term as employers start to recognise that lowering pension contributions to defined contribution (money purchase) pension schemes will change the workforce profile as a result of older employees having to keep working that much longer. Equally, employee pressure to increase pension contributions is likely to have an impact on future employer contributions.

In a perfect world, we would all be paying more into pensions. They are tax efficient savings and they help you to build what could be a larger pension fund at retirement. With that larger pension fund there is more to buy a retirement income with, and that’s really what it is all about. Naturally, a bigger pension fund means a higher income.

Is income drawdown for you?

Do you want flexibility with your retirement planning? If you do, income drawdown could be the right solution for you. Normally, pension holders can take a regular income from their pension fund between the ages of 55 and 74, as long as they have enough funds in their pot to do so. Upon retirement, 25% of the value of your pension fund can be taken as a tax free lump sum and the remainder used to provide you with a regular income, which is subject to income tax at the prevailing rates. This retirement income can be arranged by buying an annuity as a form of secured ongoing income from an insurance company, or it can be done through income drawdown.

Income drawdown is an arrangement whereby you take an income directly from your pension fund, whilst the fund itself remains invested. You can take 25% of the value of your fund as tax free cash as you would be able to do if you were to buy an annuity to provide you with an income. New income drawdown rules were introduced in April this year. One of the major advantages of income drawdown is that it allows you much greater control and flexibility with your retirement planning. With an annuity your income is set for life, but with income drawdown you can vary your income, within prescribed limits – you can effectively have a flexible income.

In a capped drawdown arrangement, there is no minimum amount of retirement income that must be taken, no matter how old you are. So, if you prefer, you don’t have to take any income at all. With income drawdown the maximum income that can be drawn is 100% of the single life annuity that someone of the same gender and age could purchase based on the government actuary’s department (called GAD) published rates. Before April, 2011, the maximum income was actually 120% of this limit.

If you enter into income drawdown you can choose to move out of it at any time in the future and buy an annuity instead. If you should die during income drawdown, the remainder of your pension pot can be passed on to your beneficiaries (with a hefty tax charge being levied). The remaining fund can be passed on to beneficiaries as annuities or as income from the fund. Alternatively, it can be taken as a cash lump sum but will be taxed at a sizeable 55%.

With a flexible drawdown arrangement, you can make as many withdrawals as you like. However, you will need to declare that you are already receiving a secure regular pension income of at least £20,000 a year (from a company pension, perhaps an annuity, or from your state pension – or a combination of these) and that you are no longer saving into a pension.

You should bear in mind, however, that with income drawdown your pension fund does remain invested and if investment returns are poor in the future, the value of your pension pot may fall. As a result, you will have to take a lower income and you will have less in your pot to buy an annuity with at a later date. What’s more, if annuity rates fall while you’ve remained invested, when you do come to buy an annuity, the annuity rate you receive could be far lower. However, looking at this positively, if your pension fund does grow over the years, you’ll have far more to buy an annuity with.

Annuities for 2012

The future is looking bright for fixed-term annuities for 2012. Today’s annuity market is somewhat different from what is was just five years ago. We have seen significant growth in the enhanced annuity market and a great deal of development in other at-retirement product areas, such as the investment-linked annuity. However, in a recent Retirement Planner poll hosted on, advisers were asked their views as to where they see growth coming from in the next five years in this market. The majority of them (somewhere around 65%) said they expected the fixed-term annuity market to deliver substantial growth in terms of market share in years to come.

Living Time was the most high profile company in this particular market for some time but over recent years we have seen an increase in activity with other companies such as LV=, Aviva, Just Retirement and also MetLife, amongst others, entering the market. These products have also undergone some interesting design innovation over time. Aviva’s product offers clients the potential of investment upside, while Just Retirement was the first insurance company to offer a fixed-term annuity contract allowing the client to move to an enhanced annuity should they fall ill during the selected term of the annuity.

After a difficult start, growth in the market has been aided by issues such as the current investment volatility we are witnessing, and, in the early days, it was like inventing the television three years before the BBC actually started making television programmes, so it was very difficult to start with. The circumstances today are very different – there is a more mature market, and financial advisers have more product choice to consider for their clients. A fixed-term annuity is a good product for those concerned about what might happen in the future – it is a guaranteed product and in this particular market, people are more interested in the likelihood of having their pension fund monies returned to them, never mind the fund’s ongoing rate of investment return.

There are many factors that can contribute to a growth in the market. Firstly, increasing life expectancy means it is unlikely to be in a clients’ best interests to tie themselves into a conventional annuity rate at age 60 or 65 as they will be unable to change to what might be a more suitable product should their circumstances change in the future. Once you buy a conventional annuity you’re stuck with it for life. Secondly, we have historically low gilt yields at the moment, which spells bad news for those looking to buy an annuity right now – annuity rates are at their lowest point ever. 

Fixed-term annuities allow clients to delay, or defer, taking a decision about buying a lifetime annuity after which time they can take the remainder of their pension fund and decide what their best option is. For example, many retirees may find they have developed a medical condition in later life that would enable them to qualify for an enhanced annuity rate with the corresponding lift in retirement income. There is also the possibility that gilt yields could improve from today’s low levels and so an increased income could be taken at a later date – hopefully.

The ability to defer taking the important irrevocable decision to annuitise is a major factor behind the developing interest in fixed-term annuities, and, indeed, other products. There is a type of customer who would ordinarily buy an annuity – for the security and peace of mind of a guaranteed regular income – but at age 65 today people have a very different idea of what their life in retirement will be, and with some there is a real desire to have some kind of guarantee in place while keeping their various options open. That’s why taking advice is so important. Ultimately, the final outcome for a client could still be a conventional annuity, but the other available retirement options need to be understood.

Combining pension funds

Combining pension funds at retirement makes a lot of sense. Very few of us remain in the same occupation from school to retirement, and that can result in some cases in several different pension funds. Combining them all together can make financial sense in various ways, but only if it is handled in the right way. One reason to combine pensions is to get better ongoing investment performance and lower charges, ultimately leaving you with extra retirement income.

There are some things to be aware of when combining pension funds: there could be a downside with exit penalties, expensive pension advice, or a mistake in the advice resulting in higher pension charges. The path you take with your pension will depend on what type of pension you have. For instance, in most cases you wouldn’t combine final-salary pension schemes. Always be aware when you are moving a pension of the benefits that you are potentially giving up. You may need a higher level of ongoing investment return to match what is provided by your pension.

Other types of pensions, such as money purchase (defined contribution) schemes or personal pensions may be worth combining into one plan. This type of pension relies heavily on your contributions and ongoing investment growth to build up a pension fund. By bringing these pensions under one roof, so to speak, you can benefit from lower charges as well as boosting your fund performance. You will also be able to keep a clear eye on what’s happening to your pension performance.

You need to be aware of exit penalties that may exist on any pension contract, as these can be severe. This type of small print can certainly make it not worth your while to exit a pension plan. Your pension provider should be able to tell you if you will suffer an exit fee. Another type of charge is known as a withdrawal penalty, as this can also add up to a very significant fee just for exiting your own pension plan. However, just because you are facing high exit fees, doesn’t necessarily mean you should remain with your existing pension provider. Take advice from a specialist who can advise you as to the best route to take.

Combining pension funds is an excellent opportunity to get the most suitable pension plan possible. It is worth considering what the annual ongoing management charges are, how you could save on these charges, the investment performance of the pension fund and any future exit fees. Some pension savers like the freedom to choose their own funds, using self-invested personal pensions (SIPPs).

A good independent financial adviser (IFA) should make your retirement much easier by finding the best pension income for you and that is where combining pension funds can be particularly beneficial – at the point where you buy an annuity. Putting your various funds together to buy just one annuity will save on charges compared to buying multiple annuities – in most cases.

Annuity advice could be harder to get

Independent financial advisers (IFAs) will walk away from providing annuity advice with certain annuity sales as “it’s not worth their while”, meaning that the growth of non-advised annuity sales will accelerate. It does look like the growth in non-advised sales of annuities are set to increase post-Retail Distribution Review (RDR) as a large swathe of the market will not have access to annuity advice, Peter Quinton, of the Annuity Clearing House (ACH), claims. The ACH uses an e-application procedure for non-advised annuities and Mr Quinton expects this market will grow quickly as IFAs will walk away from writing smaller pension funds because there’s not enough in it. According to Mr Quinton, 90% of pension funds have less than £50,000, including any tax-free cash, meaning it isn’t a profitable area of business for IFAs.

Mr Quinton stated that IFAs will be looking very carefully at the processing costs involved in various areas of their business and will be understanding more what it is costing them to write profitable business. He added that if qualifications for IFAs have improved and the level of expertise has got better, why would an IFA want to lose money by dealing with smaller sized pension funds? Naturally, this doesn’t mean to say that IFAs won’t stop doing this as some IFAs will have investment clients with huge investment portfolios but that will not be the norm. As a service to IFAs ACH currently shares the commission “50/50″ with the IFA who introduces the client.

Mr Quinton suggests that because of the way ACH do annuity business, the life office pays them a lot more commission so they can still pass on 1% to IFAs. So it makes a lot of sense for those IFAs to recommend clients to ACH, particularly on smaller funds. ACH have now got 1,400 registered IFAs, and that, they say, gives them clout in the market to be able to negotiate better terms with providers. He suggests that the next round of retirees coming up in the next five to ten years will “have a very tricky time” sorting out their retirement incomes, because they haven’t saved enough and won’t get enough and we have got a stockmarket in the condition it’s in.

Although Mr Quinton believes that wealthy clients will be the only ones who will obtain good quality annuity advice post-RDR, he believes that a few years down the line clients will be prepared to more willing to pay for advice.

Retirement advice – it’s worth having

Taking retirement advice is important. You cannot fail to be drawn into the very public concerns about both retirement and pensions which are raging constantly at the present time. It used to be the case that approaching your retirement was something to be considered as a positive experience – you’re finishing work, after all. The recently retired generation had few issues about retirement, when to retire and how. This is just not the case for those individuals in their fifties who are now on the road to the next stage of their lives, where work will be a distant memory – hopefully.

Instead of eager anticipation about retiring there is now a general trepidation about what to do and when to do it and whether or not it will be necessary to work on even longer to a ripe old age. This has not been helped by the recent increase in retirement age for women, the next quota of female retirees will only qualify for their state pension once they reach 65; men will have to be 67. To add to this the minimum retirement age for people is currently 55, the age when you can claim your private pension benefits.

A stark warning and some early retirement advice. Do not wait until you’re getting on to start planning your retirement, the earlier you bite the retirement bullet and get on with things the better. It’s important you save what you can into a pension fund from an early age if you’re to have enough in your pension fund to retire on when you wish, so look carefully at your expenditure, your savings, your assets, and your debts, to work out how much you can afford to save.

You can also evaluate your state benefits – you can easily establish what you are entitled to currently and then your projected pension benefits. You might be surprised to find that things have changed and there are entitlements that you are potentially missing out on. Importantly, consider your pension – make sure that you obtain a meaningful projection about the amount in your pension fund. Then take retirement advice on how this can be put to best use. Doing all this could make your eventual move into retirement less stressful.

Annuity rates for 2012

Annuity rates for 2012 don’t look good. Annuity rates are falling, and have been for around ten years now. On the basis what goes down usually goes back up at some point, just what is the prospect for a rate rise any time soon? The simple answer is that rates probably won’t rise soon which actually means a tough choice for many retirees when they’re arranging their all important retirement income.

People are living that much longer these days, so their pension funds have to last longer and that ultimately means annuity rates are more likely to drop as insurance companies won’t be able to afford current annuity payouts as they’ll be paying them out for that much longer – as an example, a 65 year old man retiring today could expect to live for about another 22 years, statistics suggest. On top of this, medical science is constantly improving, enabling people to live that much longer, even if they have more severe, life threatening medical conditions. The job of actuaries is to calculate how long you will live when you buy an annuity at retirement and they will take into account improvements in life expectancy generally, and look at factors effecting you specifically.

Will interest rates make a difference make a difference to annuity rates? Well, interest rates must go up eventually which will in turn increase annuity rates to some degree – but when? The UK economy is going through a difficult time at the moment and low interest rates have traditionally been seen as the classic stimulus. But there isn’t likely to be a rise in interest rates for the foreseeable future. So good news, and bad news, if you see what I mean.

Then we have the Government’s programme of Quantitative easing (called QE), which involves them effectively printing money – this programme actually has the effect of lowering annuity rates. There is also a European influence. The EU have stated that in December 2012 all annuity rates will have to be unisex – the same for both men and women. Some estimate a fall of around 6% in male rates and a rise in female rates, although we’re unclear as to how much the rise in female annuity rates will be at the moment.

In 2013, we have new EU financial requirements, called Solvency 11. This harmonises EU insurance financial regulation, primarily this concerns the amount of cash insurance companies must hold in reserve to reduce the risk of them actually going bust. This too will effect annuity rates and drive them lower still. The expected impact is a reduction in rates of between 10% and 20%, which is quite a hit.

Instead of buying an annuity and locking in to what might be a low annuity rate for the rest of your life, you could consider income drawdown – where you gradually take cash from your pension fund, but your pension fund remains invested in the hope of future growth. This might suit a few people with larger pension funds, but, in general, there is no easy answer when it comes to sorting out your retirement income and you should proceed with care and understand why you are considering taking a certain course of action – and of course, you should shop around.

Pension schemes still closing

Pension scheme closures are continuing, says the National Association of Pension Funds (NAPF). The pensions landscape has changed considerably in recent years. Yes, more final-salary pension schemes have been closed to existing staff in the private sector during this year, a report says. Around 23% of pension schemes are shut to future contributions from existing pension savers and to new staff, the NAPF said. This compares with just 3% in 2008, and 17% last year.

The NAPF estimated that 250,000 workers have moved out of final-salary pension schemes in the past three years. This shift from final-salary pension schemes to defined contribution (money purchase) schemes, which shifts much of the risk over to the employee, has been one of the key trends in the pensions market over the past twenty years. The NAPF’s annual report, based on surveys of their members from July and August, found that only 19% of final-salary schemes in the private sector were actually still open to new employees. Around 88% of final-salary pension schemes were open to new members at the start of the last decade, as a comparison.

The private sector is seeing a massive, possibly seismic, shift in its pensions, and more change is certain. Final-salary pension schemes are coming off the table and are either being watered-down somewhat or replaced altogether, comments Joanne Segars, NAPF’s chief executive. She added that demographic and financial pressures mean businesses are having real problems affording these pensions. Increased life expectancy was one of the principal factors in companies’ decisions to close final-salary pension schemes. However, the state of the British economy was likely to be the key feature in determining the future direction of how pensions are provided, she added.

Joanne Segars called on the government to make important regulatory changes that make it easier for companies to shift their pension scheme offer to a career average scheme, similar to some of the proposals being discussed for changes to public sector pensions. She predicted that within a few years, pension schemes in the private sector would be primarily based on a defined contribution money purchase model. In these schemes, employees and employers have to make choices about how much of their salary goes into their pension pot.

The NAPF’s report suggested that despite the prolonged financial squeeze on household and business budgets, total contributions to pensions have remained stable at around 12% of salary over the last five years. Pension schemes still closing is a headline I expect to see for years to come.

More retirement options than ever

There are now more retirement options than ever, making retirement quite a complex business. There are frequently changing rules and regulations, and longer-term trends, which together make the choice of retirement product a much more complicated process these days – it was much simpler just a few years ago. While insurance companies grapple with increasing life expectancy, stockmarket volatility has provided an extra dimension, and there is anxiety for pension savers, trying to make sure they have enough to live on when they stop work.

New regulations relating to income drawdown and buying an annuity have also opened up the pensions landscape, ensuring that the need for advice at retirement is more important than ever. However, the Retail Distribution Review (RDR) is throwing an extra factor into the evolving pensions landscape, raising the question of whether individuals will be able to afford the retirement advice they need to secure a pension in the long-term, and this is important with the various retirement options now available – it’s not just about buying an annuity any more.

Insurance companies will also be affected. As their business models develop, and they can no longer rely on commission, so they will have to adapt, bring out new products, and become more competitive. But they will have to move soon if they want to secure their position with financial advisers in the so-called brave new post-RDR world.

The Open Market Option, which allows people to shop around at retirement for the best deal, is also being looked at, to try and ensure more people are aware of it’s true benefits – it helps people get a higher retirement income. Hopefully, at the very least people can be made to avoid inertia when it comes to their important personal finances.

All these various factors add up to a challenging time ahead for both financial advisers and clients planning for retirement, although efforts are being made by the pensions industry as a whole to address these issues. Certainly, at we believe it’s important that people approaching their retirement are aware of the various options available to them, so they are in a position to make the right choices.

You can get a higher pension income

Even with the recent 10% fall in annuity rates you can get a higher pension income – if you shop around to find the best provider. While earlier generations might have gained from higher annuity rates, those retiring today generally have higher levels of personal wealth; and using that wealth smartly can offset the pain. Just because your pension fund has been saved with Standard Life, Aviva, Aegon, Prudential, and the like doesn’t mean you have to take the annuity they offer – it’s unlikely they’ll offer you the best deal. Annuity rates can vary by as much as 20% on exactly the same deal. Make sure you check out what’s available.

Importantly, you must tell your adviser or a pension company about any existing medical conditions or what might be termed ‘negative’ lifestyle factors. Smoking 10 cigarettes a day can get you 33% more income a year, Just Retirement says. A stroke four years ago can give you 23% more income. And in more extreme cases, such as chronic kidney failure, you can even double your annual income.

It’s crucial you take the time to speak to a specialist financial adviser before you make an annuity purchase, as it’s one of the most complicated and important financial decisions you’ll make in your entire life. All of the factors affecting the annuity market could make a few percentage points difference to the annuity rate you’ll get. Depending on your personal circumstances, you could boost your income by up to 40%.

To get a higher pension income there are three important questions you must ask yourself before you set about purchasing an annuity: do you smoke? are you taking prescription medication? have you been hospitalised for a period in the last five to ten years? If the answer is yes to any of these questions then you’re almost certainly entitled to a higher pension income. If you can be flexible as to when and how you take your retirement benefits, you may benefit from more advantageous annuity rates due to being slightly older. Annual rates rise depending on your age; the idea being that you’ll be getting paid for fewer years and so you get a better rate per £1,000 of pension fund.

You could consider an alternative, a fixed term annuity, offered by the likes of Just Retirement, Aviva, LV=, and MetLife, where you select an initial period of three, five or ten years, for example. With Just Retirement, if you develop certain medical conditions during that time, or an existing medical problem worsens, you can opt out and buy an enhanced annuity. Otherwise you can wait in the hope that rates might have returned to a better level in the future.

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