Paul Leatherbarrow, Liverpool
What is the Open market option?
One of the key points in your retirement planning and turning your pension fund in to a retirement income is the choice you have when you decided to retire. Too few people are not aware they can purchase an annuity or take income drawdown with any provider, so why are customers not exercising their right to obtain the best possible income in retirement. The majority do not realise they have only been saving in to a retirement fund in their name with a product provider and have not yet got a pension. When the pension pack comes through the door some people sign up straight away as they do not know any different. This may also be due to the fact they do not understand all the information in front of them and feel a little overwhelmed with the jargon provided by the insurance company, believing the easy option is sign the pack and sending it back.
Only 1 in 3 people reaching retirement shop around despite their being whole of market advice out there. On the plus side the Government has realised this is a major issue and highlighted this in their recent pension review. Most industry experts believe the default option should be the open market option ensuring customers research the best possible income available to them. Many believe pension providers have been pulling the wool over the eyes of annuity customers for years using compulsory pre-retirement information packs as an opportunity to push their own products, providers make it look like the easy option. An annuity is a once in a life time contract and there is no way out once signed up. Unlike final salary schemes where retirement income is guaranteed it is the individual who has the responsibility for fixing a retirement income under Defined Contribution arrangements whether through an annuity or income drawdown plan. Defined Contribution schemes have been the most common replacement for the final salary schemes that have closed in the past 15 years.
People need to be aware of the issues at hand, the options available and the implications of choice. Especially as making the right decision is very important as there is no going back and rectifying any mistakes. The Pension regulator is concerned that only 23% of members are exercising their rights to shop around, especially as the majority who fail to do so are making a costly mistake. Those who do shop around add 17% to their retirement income. Many people could find they are entitled to an enhanced annuity if they have suffered from health problems, (which are not clearly highlighted in most pension packs) which could boost retirement income by 33% for serious conditions. Experts are warning pensioners that now more than ever its time to shop around for the best annuity as the gulf widens, figures show that the difference between the best and worst annuity is 36.82% for men and 37.22% for women. Many are missing out because they believe the open market option is complicated and stressful or they are not aware they can move their money. The difference between an average annuity and an enhanced annuity is 24%. Clients must seek advice not just on what are the best annuity rates but also which product to use whether to use annuity, drawdown or temporary annuities depending on which are more suitable for the individual.
Enhanced or impaired Annuities Up to 65% of those retiring might have conditions that qualify them for enhanced or impaired life annuity 12% of all annuities are enhanced Between 55 and 65% approaching retirement may qualify for enhanced or impaired life annuity The vast majority will buy annuities between 60 and 65, which means it’s more important to offer meaningful flexibility and choice to those looking forward to 30 years of annuity income. Research shows spending is high in the first 10 years of retirement after which it tails off So being locked into a standard annuity can be risky especially if we see an increase in inflation within the next 20 / 30 years An Independent Financial Advisor can assess your attitude to risk and what your aspirations are and better equip you with the right product. Exercising your annuity rights The challenges facing retirement are due to the fact we live longer, people over the age of 75 will increase by about 10% over the next 20 years. Now more people are over 60 years than under 16 years of age, which is causing fiscal deficit so the range of benefits on offer on retirement may reduce over time as there is greater strain on direct taxation.
Retirees will have to ensure they generate the maximum income over the period of their lifetime, for many this simply will not happen. There are a staggering 80% of annuity funds under 30k, which is way too small to live on People being forced into equity release (equity tied up in home of people aged over 65 as high as 800bn 2009) 53% of people over 55 said they would consider other options part time / full time work if they can find it to supplement retirement income.
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