Much has been written in the press recently about the options available when you choose to buy your pension income.
Steve Webb the government’s pension minster has made a number of speeches on how individuals should get the best value from the hard earned savings retained in pension plans.
So what has he been saying and what does it all mean.
Steve Webb has been quoted as saying that annuities should be more flexible and that he would like to see pensioners have future opportunities to buy a better annuity rate in the future.
He would like pension providers to offer some flexibility on buying lifetime annuities, say for example annuity rates rise and you bought your income at a lower annuity rate, the pension’s minister would like pensioners to be given another opportunity to re buy a lifetime pension.
The solution Steve Webb proposes is clearly possible, however the likely result will mean that annuity rates being offered will fall as the providers need to price in the additional costs to administrate the changes and also change the way they buy assets to fund the secure income payments, this is not to say that it might not still be a valuable solution if annuity rates rise significantly over the next 10 to 15 years.
For most people reaching retirement the main objective is to secure a pension income which you can rely on, one which the value of your income is not going to fall from the initial starting level. The level of lifetime annuity bought at outset does not change; this is a lifetime purchase with no flexibility. It is important that you consider your options carefully as they may affect you for the next 30 years or more.
At CFP we do not believe that options available in buying pension income is a significant issue for most people, there is already a flexible annuity solution called “fixed term annuities” , these products allows the purchase of secure income to be achieved for a specified term, thus avoiding having to commit to the purchase of a lifetime annuity. Fixed term annuities however are not without risk, no one can predict if annuity rates will be higher or lower than there were when the decision to buy an income is made.
The vast majority of individuals still buy their pension from the company they have saved with, there are large differences in the pension annuity income you will be offered by your existing provider, compared with shopping around with your pension pot to the provider who is willing to pay you the highest income for your accumulated pot (this is known as the open market option or OMO), in some instances the income offered on the open market could be as much as 30% higher, and we believe this more of a significant problem than creating more flexibility with lifetime annuities.
If you are considering taking any of your pension benefits in either part or full, please do contact one of our consultants, we have access to the whole of the market so we can shop around on your behalf to secure the highest level of income for your accumulated funds.