The table below shows how annuity
rates affect your actual pension.
The problem is that the amount you get for the whole of your
retirement is dependent on the interest rate at the date of
retirement. And that's not been very good. Annuity rates have
fallen recently from nearly 9% to about 5%.
Shopping around
That's the bad news, so what can you do about it. Well you can shop
around for best annuity rates. Just because you have your pension with
one company, doesn't mean you have to buy the annuity from them.
And here is an example of just how much you can make, by taking
some time over the decision. The difference between one of the best
and one of the worst annuities at the moment (quoted by the Annuity
Bureau) would mean this for your bank balance:
-
£1,030 a year for a man aged 60 (a 21% difference)
-
£1,322 a year for a woman aged 60 (a 31% difference)
The Annuity Bureau
and
Annuity Direct
provide independent advice on annuities. More detailed help is
available on these sites!
Income draw-down
Since 1995 you can opt for income draw-down which allows you to
take money directly from your pension pot instead of buying an
annuity immediately. Income draw-down contracts (also known as a
Flexible Pension or Pension Fund Withdrawal) are offered by most
pension companies for those with a fund of at least £100,000.
This allows you to defer the purchase of an annuity until
age 75, while still drawing a limited, but regular, income.
Staggered
Retirement
An alternative approach is known
as Staggered Retirement or Phased Retirement. Many people who
purchase a pension annuity do not take out any form of built-in
protection against inflation.
Again you have to be finished with it by the time you are 75 years
old. But it enables you to take part of your pension now and leave the
rest until later.
There are lots of restrictions which limit the amount you can take
and there is a danger that you will destroy your capital. It is worth
considering, but once you are 75 you HAVE to buy a proper Annuity.
The Income Drawdown
Advisory Bureau is an independent specialist which will advise on
income drawdown, as well as phased retirement and annuities.
With-Profit
Annuities
Finally there are a few companies which offer "With-Profit
Annuities". This enables you to buy an annuity with a guaranteed
minimum monthly payout but then you get extra money if the fund in
which the money is invested performs well.
There are only three major companies offering these policies at the
moment and you do want to take careful advice before buying any
annuity. There is some risks attached because if the fund does not
perform well then you won't earn as much money.
But because even With-Profit funds have a guaranteed minimum, the
risks are limited. And this may be a way to help you combat the
challenge of living off low interest rates.
Several important changes have affected the pensions industry
over the last few years:
Personal
pension mis-selling
In 1994 the SIB (now the Financial Services Authority) acted to
clean up the pensions industry following claims that many people sold
private pensions would have been better off remaining in or joining an
occupational scheme. So the pensions industry was required to review
all personal pensions sold between 29/4/88 and 30/6/94.
The first phase of the review concentrated on "priority" cases -
those who are at or near retirement and those who have died. The
deadline for most firms completing the priority cases was December
1998. The second phase, for those who are more than 15 years away from
retirement, has been through the consultation process and those who
may be affected should have been contacted in the first three months
of 1999.
In May 1997 Treasury Minister Helen Liddell started "naming and
shaming" pension firms who were not tackling the review seriously
enough. Large fines have been levied on the most serious offenders -
though the Pru escaped being fined because it is regulated by the SIB
and not the PIA.
Bankrupts to forfeit personal pensions
Bankrupts face the prospect of having their personal pensions
forfeited following a High Court ruling in Dec 1996. The Landau case
ruled that all payments from bankrupts' personal pensions were assets
to be used to pay creditors.
Bankrupts will now forfeit their entire pension for life.
Insolvency practitioners are reviewing bankruptcies going back 10
years.
The Pensions Act
1995
Since 6th April 1997 the Occupational Pensions Regulatory Authority
(Opra) is responsible for ensuring that those who run occupational
pensions schemes meet their legal obligations under the Pensions Act.
There is an Independent Complaints Adjudicator who can suspend or
disqualify trustees. Scheme auditors and actuaries will have to act as
whistle-blowers and tell Opra if they think something is wrong.
The Pensions Ombudsman's role has been extended so he can look into
disputes between trustees and employers.
The Pensions Act states that if money has been removed dishonestly
from a pension scheme the employer must make sure enough money is put
back into the scheme to pay future benefits.
If the employer is insolvent and unable to restore the funds the
pension scheme will be able to claim compensation (up to 90%
compensation). This is administered by the Pensions Compensation Board
which will apply a levy on occupational schemes as required.
Pension Trustees
Under the Pensions Act scheme members have the right to choose at
least one third of the trustees - Member Nominated Trustees (MNT).
Employers can opt out but only if the members, having been given a
formal opportunity to object, are in agreement.
A new minimum funding requirement aims to ensure there's enough
money in final salary schemes to pay pensions if a company goes bust.
Fund must be valued every three years and, if the expert valuers
say there isn't enough money, employers have to increase their
contributions to the scheme.
Where a pension scheme invests in the employer's company Trustees
now have to make sure that no more than 5% of the pension fund's
assets are invested in the employer's shares.
Pensions for
divorcees
From 1 July 1996, as part of the Pensions Act 1995, in divorce
cases a judge is obliged to look at pensions. The judge will not be
able split a pension, but will earmark parts of a pension, parts of
the death-in-service benefit and parts of a lump sum payout for the
ex-spouse.
A clause on pension splitting has been written into the Family Law
Bill, expected to progress though parliament in the next year.
Splitting means that the pension can be divided at the time of
divorce. Any capital sum awarded to the wife from the husband's
pension fund will be solely restricted to providing a pension income
for herself.
Pension Basics
