Conal Gregory: It pays not to put nest eggs in one basket

Published on 09/09/2012 01:12

Retirement should be a time to take life at a slower pace, enjoy one’s hobbies and not worry about finance. Yet thousands who retire each year are not gaining the best deal with the savings built up often over a lifetime.

By using an experienced independent financial advisor, anyone approaching retirement should not only be able to gain valuable guidance on the timing and route but often a much larger sum. Far too many born between 1947 and 1952 will simply take the easy option of accepting the quote from their

pension plan provider without checking if it can be improved.

Yet converting a pension into a regular income with a different provider may result in its value rising by 30 per cent, according to research by the National Association of Pension Funds and the Pensions Institute. The actual amount will depend on individual circumstances which include health and lifestyle factors, as well as the rates available at the time of purchase.

“It is key that everyone retiring utilises their ‘open market option’ where they are able to

establish which provider in the marketplace offers the greater level of income and/or benefits,” says Scott Mackintosh, director of EIC in Edinburgh.

He adds that IFAs should ask the relevant questions to establish whether a client may be considered for an enhanced or “impaired” life annuity. “Even a very low smoker can be considered for these solutions and may find a marked increase on the level of income they would attract from their retirement pot,” says Mackintosh.

“There remains a huge inertia on annuities, particularly on the merits of exercising the open market option,” says Alex MacLean, managing director of Aspire Wealth Management in Edinburgh.

Annuities have been falling in recent years and are now at historically low levels, partly because government bonds or gilts, which are linked to annuities, are so low, with a ten-year-old gilt now paying less than 1.5 per cent. A 65-year-old man with a £100,000 pension could have purchased an annual annuity of almost £8,000 in July 2008, but the same sum will now only pay around £5,900.

Among those who can secure enhanced rates are diabetics and those with other health conditions. Even your postcode can have a positive effect on annuity income for some.

“There really is no substitute for diversification,” says MacLean, “Don’t put all your eggs in one basket: consider guaranteed annuities and perhaps alternatives such as stock market-listed annuities.”

Grant Walker at Edinburgh Risk Management says that for those retiring who require a guaranteed income with no investment risk, “annuities are still the best option irrespective of what current levels are at”.

He says that for those who wish to defer purchasing an annuity but who still wish to generate an income from their pension fund, “income drawdown has become a popular option in recent years – although it does involve investment risk and so may not be appropriate for some.”

For those who qualify for an enhanced annuity, there are currently eight providers. A detailed questionnaire is required to be completed which an IFA can assist with.

The Office for National Statistics last month said that the average 65-year old could expect to live another 17 years 10 months. This

longevity has also reduced the value of new annuities, as will almost certainly the demand of the EU gender directive that from this December there should be no discrimination between the sexes as to their respective rates.

Roland Oliver, of Oliver Asset Management in Musselburgh, says: “I’m amazed at the number of people who opt for buying an annuity from an online provider, who will provide numbers based on certain criteria, but leave it to the sometimes-not-informed client to make the right choice.”

Getting the right form or type of annuity wrong can cost dearly in the long run. Consider whether to take a higher single life or a lower life joint annuity with the latter paying out until the final person in the marriage or partnership dies.

Retirees should also consider whether and for how long to opt for a guarantee. This means the annuity provider will keep paying for that length of time even after death so that the estate benefits. Annuity purchasers often like this aspect as, if they should die days after purchasing a non-guaranteed annuity, the provider has no obligation to pay anything further.

If both partners are aged 65, it may make sense to opt either for joint life or a guarantee but not pay for both aspects. An IFA will talk through such options and the respective costs.

With inflation eroding savings, an index-linked annuity is another factor. The options include a fixed percentage rise every year or five years or to align the annuity to a benchmark index, like the RPI.

Oliver has seen an increase in asset-backed annuities through companies like Prudential. This is a route to obtain a higher starting income based on potential future investment growth but comes with an underlying minimum.

Mackintosh also considers this approach helpful for some clients. While the income can fluctuate, it can equally well rise. Mackintosh favours Prudential’s Income Choice annuity in this context.

When selecting an annuity provider, ask how solid they are in terms of assets, as annuities are not protected by 100 per cent

compensation in the event of financial difficulty.