Adding value to your pension benefits
Recently I demonstrated how you might add value to your income from a non-pension lump sum.
This week I want to look at how value might be added to the pension benefits themselves.
There are a number of ways in which you can extract the income from your pension scheme:
- Unsecured pension
- Scheme annuity
Many of those who get the length of taking their benefits are at a point in their lives where they do not wish to take any investment risk and so they naturally look to the annuity as the answer.
But what does the market offer in this respect? One important point to remember is that ‘shopping around’ is an absolute must.
However, by ‘shopping around’ I don't mean just going onto the Internet, as there are a number of annuity providers who will only operate via a financial adviser.
If you use an independent financial adviser they should be able to show you all the products available based on the risk you wish to take and which are suitable to your stated needs.
But first — back to basics. An annuity, quite simply, is an income that is arranged in exchange for a lump of money — in this case your pension fund.
The annuity can offer a number of features such as ensuring that when you die it will continue for your spouse.
It can be inflation proofed. It can be linked to investments — either in whole or in part. In any event you will need to get a range of quotes and options in front of you in order to decide what will suit best.
There are a couple of points to note here. The best rates will be for a level annuity based on a single life. The more bells and whistles you add on, the more the starting price will drop.
This is important because it is likely that if you have just left full time employment there will be a significant drop in your take home pay.
shopping around really is an absolute must
The other problem is that once you have set up an annuity you cannot change your mind afterwards, which can be very awkward if your circumstances suddenly change.
But there is good news in that there are some innovative companies out there and they have come up with a number of variations that will give you both a better starting price and more flexibility. Here are some examples.
One of the less well-known features of an annuity is that the shorter the time you hold it for, the better the income level is likely to be. Using this feature, some companies have set up plans which give you a fixed term for your annuity coupled with the option to either repeat what you have just done, or go somewhere else if you think you can get a better rate.
You will also be aware that at age 75 you must buy an annuity or go into an alternatively secured pension. So there is a plan that will take you up to age 75 then give you back your original cash so you have all your choices again.
Or there are products where you can set a shorter term and carry out the same exercise.
This could be very useful if you are in poor health or your health suddenly takes a turn for the worse. If poor health is a factor — for either yourself or your spouse — you should ensure that you get to see a range of what are called Impaired annuity quotes.
One of the quirks of the annuity being the shorter your anticipated lifespan is, the better the rate.
The message here is to make sure you see all the choices and not just a limited range of pension annuities.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk