Rates are at a record low so investors beware – buying an annuity could seriously damage your wealth, says the Pension Drawdown Company
When financing your retirement, an annuity can seem like a good option. Annuity rates loosely follow the Bank of England base rate (see chart). With the base rate being held at a record low for the past 28 months, the Pension Drawdown Company managing director Jonathan Walker says: “Surely there is only one way left to go, and that’s up!
“The close correlation between the Bank of England base rate and the Government Actuarial Department (GAD) rate – which is what annuity rates are based upon – means that when this happens, annuity rates should start to rise and each hard-earned pound of your pension saving will buy you more income in your retirement.”
The minutes of the Monetary Policy Committee meeting in July state: “Expectations implied by market prices of the point at which bank rate would begin to rise had been pushed back further during the month.” The minutes also suggest that “financial market participants expected bank rate to have increased by 25 basis points by around the middle of 2012.”
With the recent changes in pension legislation, the income drawdown option has now become even more flexible
But there are other options. Walker vents his frustration with the poor annuity rates currently available: “With most annuities, once purchased, that is it. Your capital is gone and your income is set for the rest of your life. If you secure this income now while annuity rates are at an extreme low, when the rise in rates does happen how annoyed will you be that your hard-earned cash could have bought you more income?”
In these circumstances, he foresees many people being upset at the fact that they are forced into buying annuities because they need the income and cannot afford to delay their retirement in the hope that rates might improve.
There are alternatives. The Pension Drawdown Company specialises in providing advice to clients regarding their retirement options, including alternatives to buying annuities.
This includes using your pension capital to provide you with an income in retirement while keeping the main pension fund invested. In this scenario clients maintain ownership and control of their fund; if and when someone is ready, they can use the capital to purchase an annuity when rates have improved.
According to Walker: “We find the majority of our clients favour the pension drawdown route because of the flexibility it offers, and even when annuity rates have improved they will choose to stay in drawdown.” Pension drawdown is not the right solution for everyone, though, and the unsecured nature of the income means that the arrangement does have an element of risk. However, the benefits of a drawdown plan could far outweigh those of an annuity. Income is flexible in that if you have enough income from other sources, you can turn it off, whereas if there is a time when you have too little, you can increase your income up to the maximum allowed.
Death benefits are another strong advantage of a drawdown plan. Upon death, all of your plan value can transfer to your spouse, leaving them to choose the best option, Walker says. This could be either drawdown or annuity.
If there is no spouse then the fund can be left to another nominated beneficiary as a lump sum (subject to a tax). Although only a portion of the fund can pass on to beneficiaries other than spouses, this is still 45 per cent better than with an annuity. Alternatively your fund can be left in its entirety, free of any tax, to a charity of your choice.
Indeed, in a recent survey of the Pension Drawdown Company’s clients, 100 per cent of them agreed that either of these options was preferable to their money being passed onto a life assurance company.
With the recent changes in pension legislation, the income drawdown option has become even more flexible. There are two main choices for drawdown – capped or flexible.
With a capped drawdown you can receive income up to the maximum allowed under the current GAD rate and this can now continue beyond the age of 75 (previously the government had insisted that you find a new home for your pension at 75).
Alternatively, if you receive at least £20,000 of secured income from other sources (including company pension, pension annuities and state pension), you also have the option of flexible drawdown. This allows you to draw as much income as you need or require for any use, subject to your marginal rate of tax.
The strength of the Pension Drawdown Company’s approach, according to Walker, is: “Our proactive management style, which is based on the simple ethos of buying when markets are low and selling as they increase.”
Using a wide range of recognised and award-winning funds in many different sectors ranging from Schroder’s Income Maximiser fund (featured opposite) to JP Morgan’s Natural Resources fund, the Pension Drawdown Company advises its clients to switch funds regularly, where appropriate, for example to take advantage of the best buying opportunities, or to reflect the client’s changing attitude to risk.
“Our many years of knowledge and expertise are reflected in our excellent success rate of growing funds and in our clients’ testimonials, all adding to our belief that choosing a pension drawdown is the right choice to maximise flexibility in retirement,” Walker adds.
0800 0304 008
The Pension Drawdown Company will review Senior Living readers’ current plans for free. Any work recommended and carried out will be offered at a reduced tiered rate of 3 per cent of the fund value for transferred fund values above £75,000, 2 per cent for over £200,000, 1.5 per cent for over £300,000 and only 1 per cent for transferred fund values over £500,000. Contact 0800 0304 008 and let the company’s experts help you to protect your wealth.