So many options...
Nowadays, when a member wishes to access their pension savings, there are a wide range of benefit options available such as cash, drawdown, annuity purchase or a combination of options. Some of these options can be very complex and there is often a need to take financial advice.
Although annuity purchase is often considered a straightforward option, there can still be a need for the member to take financial advice to avoid selecting the wrong type of annuity. The following case, dealt with by our Retirement Services team, highlights this point.
A member of a scheme approached our Retirement Services adviser seeking advice for the best annuity provider to establish an escalating annuity increasing in payment at a rate of 3% per annum. A key role of an adviser is to ensure what the member intends to do is right for them although in this case, annuity purchase was appropriate because the member needed a secure income for life. However, the issue was whether a pension which increased at 3% per annum was the right solution.
The member was in their mid-60s and the most competitive quotation obtained, based on the value of the member’s pension savings, quoted a starting pension of £830 p.a. escalating at 3% annually, or a fixed pension of £1,180 p.a. Our advice was to buy the fixed pension for the following reasons:
It would take 13 years before the escalating pension increased above £1,180 p.a.
23 years would need to elapse before total payments from the escalating pension increased above the total payments from the fixed pension.
Current life expectancy for those aged 65 is 18.6 years for males and 20.90 years for females.* *source: ONS National Life tables, UK 2015/17, issued 28.09.2018
Enhanced annuity terms had been obtained due to the member’s medical history. Those conditions may have an impact on life expectancy.
There is normally a charge for advice, but this can usually be paid through an agreed adviser charge taken from the plan value or commission factored into the annuity rate. As in the above case, this can represent good value to avoid the member making a poor decision. Lots of generic retirement guidance is currently available, but individuals often need financial advice.
Active members of a workplace pension scheme are often sheltered from having to make decisions regarding their pension savings. Most tend to have their savings invested in default investment strategies which are usually well governed.
However, this changes when the member wishes to take benefits.
Faced with the range of benefit options available, members can feel isolated and unsure on which option to select. Here is where the financial adviser can play an important role in delivering a solution relevant to their needs.
Our Retirement Services advisers can deliver a cost effective service to ensure your members make the rights decision when taking benefits.
Contact our team to find out more about the services we can provide in this important area.