Review your options when you retire

Stephen posted on January 17, 2012 15:37

Ensure you have checked all your retirement options

If you’re coming to the end of your working life, you’ve some big decisions to make, not least concerning your retirement finances. When it comes to your pension, you need to ensure you get the best deal. If you don’t, you could regret it for years.

When you retire, if you have a money purchase (defined contribution) rather than a final salary (defined benefit) pension, you generate income by using your accumulated pension fund to buy an annuity, which is guaranteed to last until you die. If you wish, you can take up to 25 per cent of your fund as a tax-free cash lump sum, but the rest must eventually be used to provide an income in this way.

Many people, not unreasonably, assume that they need to buy their annuity from the same insurance company that has managed their pension investment over the years. But this isn’t the case. The Open Market Option (OMO) exists precisely to allow people to shop around at retirement to find the best annuity.

In the past, insurance companies have kept pretty quiet about the OMO because they wanted to keep hold of the business. A common tactic was to send an annuity application form to people approaching retirement age in the hope they would simply roll their pension savings into an annuity with the same firm.

But the industry’s trade body, the Association of British Insurers, is introducing a code of conduct that will prevent its members sending the application form and oblige them to tell their customers about their right to shop around.

It is at this point that you need to get independent advice. Different insurance companies offer different annuity rates, which can make a substantial difference to your income. What’s more, there are different types of annuity on offer, so you need help to ensure you get the best one for your circumstances and preferences.

Expert advice is crucial because the annuity rates currently on offer are at an all-time low. In 1990, a 65-year-old man could expect to get an annuity rate of 15 per cent, meaning every £10,000 of pension pot would generate £1,500 of income each year. Now the annuity rate is nearer 6 per cent.

Various factors account for this fall. For a start, we’re enjoying increased life expectancy, which means the annuity providers have to pay out for longer. The providers are also suffering reduced income on the investments they have to put in place to underpin their annuity business, so there is less money available.

If you look at today’s dismal annuity rates you might be tempted to hold fire and wait for things to improve – and you can indeed defer your annuity purchase. But this is a very delicate decision. After all, rates could fall even further. And where what will you do for income in the interim? Again, you need to talk to your adviser to identify the best option.

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