The retirement options maze
First published 11 December 2014 • Updated 13 March 2018
Navigating your way through the retirement-planning maze can be stressful. Don’t do it alone, seek professional advice, says Nick Bamford.
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The subject of retirement options and annuity purchases have been in the news a lot recently. Many consumers have missed out on enhancing their retirement income by not “shopping around” for a better deal than that on offer from their pension plan provider. The exercising of the “open market option” (moving your pension plan fund to a provider who offers a better annuity rate) has, it seems, not resonated with a very large number of people.
“The adviser will also take away from you all of the administrative burden associated with getting the right outcome”
Higher retirement income
The financial regulator, the Financial Conduct Authority, in a recent review has identified that as many as 80 per cent of consumers, who have taken their retirement benefits from their plan provider, could have got a higher level of retirement income by shopping around. This is a poor outcome that needs to be addressed by all parties not just the pension plan providers. Regulators, product providers, independent financial advisers, the media and consumers, all need to work together to create better outcomes.
There are a number of reasons for the reluctance to shop around including but not limited to:
- Poor sign posting so that pension plan holders simply take the offer from their current provider
- A lack of recognition that health history (and indeed smoker status) can result in a significant uplift in retirement income
- A fear that taking advice is too expensive and that finding a trusted adviser is a difficult challenge
- And perhaps a degree of apathy and disinterest (pensions not being in the top ten of fascinating subjects!)
None of the above represents a good excuse for not shopping around. The message, which the independent financial adviser sector has been broadcasting for many a long year, is retirement planning is too complex for most people and independent, impartial financial advice is not a cost, it is a significant value.
There are alternative options to the conventional annuity and each needs to be thoroughly explored to ensure an incorrect, and often irrevocable, decision isn’t made. Consider all the alternatives:
- Deferring benefits until a later date
- Buying a conventional or investment linked annuity, lifetime annuity or temporary annuity
- Utilising income drawdown to create pension income
- Phasing benefits over time
- Mixing and matching all of the above
There are advantages and disadvantages to every financial decision we make during our lifetime, particularly so when it comes down to the at retirement decisions. Taking advice just makes real sense.
Pension plan holders will need to ask themselves a whole host of questions to ensure that they make a decision that is most suitable for them. Including:
- Do I need a guaranteed retirement income for the rest of my life?
- In the event of my death what income do I need to continue to be paid to my spouse/partner?
- Do I expect inflation to erode the purchasing power of my pension income over time? (and what can I do about it?)
- Am I prepared to take any investment risk in the expectation that I might get a greater degree of income later?
- If I have other income and capital resources can I have a flexible level of income from my pension plan fund?
- Based on my medical history will a provider give me a higher level of income than someone without my history?
Expect to pay your financial adviser a fee to help you make the right decisions. Expect them also to explain the choices and options and their specific recommendations in a way that you will understand.
The adviser will also take away from you all of the administrative burden associated with getting the right outcome. Recognise that independent financial advice provides you with a much greater degree of protection than guidance and information you might get on a website.
About the author
Nick Bamford is an experienced Chartered Financial Planner and was the previous chairman of the Society of Financial Advisers (SOFA). He is an Associate of the Personal Finance Society (APFS).
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.