Into Retirement

Effectively, retirement for most people involves using the pension fund accumulated over many years into an income (usually plus a tax free lump sum). The problem is that many people think that they have to use the same company that they have invested with all along, to provide their pension income. And the companies do not appear too keen to tell them that they do not have to, largely because it is good business for them, to hang on to the money, rather than letting it go to another provider.

But in fact almost everyone has the right to exercise that the financial services industry calls and ‘open market option’. In plain English, this means take your money and buy a better pension elsewhere.

In almost all cases, specialist annuity providers can offer a better income than the company with which you built up your retirement fund. The exception to this is where you have a guaranteed annuity rate. But beware; this normally only applies at a set age and on a level, single life basis. So if you want to retire earlier – or later – and to provide an income for your spouse as well &/or to have an increasing income, then the guarantee is lost.

There is another consideration that you need to look at. If you are a smoker, or have a severe medical condition – or these days, even if you just live in certain parts of the country, you cold also secure a better income, by picking the right type of annuity. For example the best income for a 65-year-old non smoker wanting to use £100,000 to buy a level income for himself would have been £6,406 a year (late March 2009). A smoker in the same position could have boosted his income by £20 a week to £7,452 a year. So shopping around is well worthwhile.

With annuity rates currently so low, although there is no guarantee that they will not fall further, many people are considering delaying buying one by taking their tax free cash and then leaving their pension fund to grow, possibly (but not necessarily) drawing an income directly from the fund. The hope is that fund values and interest rates rise, producing a better return as you get older when annuity rates tend to rise anyway. But beware, you are still running an investment risk and this is not suitable for everyone.

Once again, this reinforces the importance of each one of us taking personal responsibility for our retirement planning.