This blog will consider pensions as they exist today and the means of getting best value for money from a common sense point of view without making any claim on expertise as a financial advisor.
Take out a banknote and you will read across the top
“I promise to Pay the Bearer on Demand the Sum of ........”
This promissory note is the basis of our financial system replacing barter. It depends on trust and confidence and works well until abuse, speculation and greed take over, as happened recently.
With pensions this is taken even further, you do not need to “pay the bearer”, just service the loan until death occurs, currently at fairly low rates. This does not appear to be fully understood by the State, experts, or Financial services, otherwise there would be a surge in pension provision, which offers cheap, unlimited investment finance.
Customer should therefore be King, but is not, almost treated with disdain, making it essential that they look after their own interests and get value for money.
Pensions are no different to any other financial service, although on a longer timescale. One does not renew insurance without shopping around and the web has made this much easier with comparison sites.
In practice schemes offer few options and all are effectively run by the same Insurance Companies, except for the large Company and Public Sector schemes.
Choice therefore only occurs in Private schemes on retirement when the policy matures and at that stage the options have recently become much wider. Traditionally annuities have been the favourite choice; they are based on a co-operative almost collective basis centred round life tables / mortality rates, with the surviving members benefiting from the deceased.
If one does the sums for Population v Fund survival, taking into account the investment income the funds should attract one finds on current values that :-
A 4% income will sustain a payment / annuity of 6% increasing by 2.5% per year.
This is some 2% above annuity values available, which have been steadily dropping, in fact twenty years ago they were 16% !
One therefore needs to shop around, in private schemes you do not have to wait until 65, but can take pension from age 55 and the tax free lump sum. You should receive an annual statement showing the current fund value and projection of value at selected retirement age and associated pension.
Whether you are about to retire at age 65 or earlier; get a quote from your pension provider and then try other major competitors. Even simpler go on the web, where like car insurance, you fill in details and get a quote, you unfortunately have to re-run for each option. One other little known fact is on SERPS opt out, surprisingly this can be taken from 55, with cash lump sum, it is worth exploring.
You need to explore the options, many make little difference to payment sum; a guaranteed term reduces the risk if you die early, take 10 years; as does a dependent relative, do both; annual or monthly payment also make little difference. Annual in advance is a good option, it gives one more year and can meet annual bills; the tax free sum option is usually worth taking, you can clear debts, re-invest it, or make a capital purchase. If you smoke are ill etc., you can get an enhanced annuity up to 20% higher.
I recently organised my 56 year old disabled son’s pension; he had two policies, private and SERPS; shopped around got an enhanced annuity, better than existing providers, used the lump son and first annual payment in advance to put a PV solar system on his roof and the FIT income will pay energy bills for next 25 years, besides increasing the house value!
You now do not need to take an annuity but drawdown from the final fund, but there are drawbacks. You need a fund of £100,000 and charges are high; the 5% bid offer loss and set up costs; then annual costs as drawdown has to be approved by the Revenue each year. It may be better to take the annuity.
Finally, out of context, on the referendum; 28 % of electorate said no; 14% said yes; 58% did not bother. So much for democracy, it is only as good as you make it and such indifference allows Dictators. If you don’t use your legs they will wither and be useless, so will your vote!
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pension
No comments:
Post a Comment