Annuity doomsday

Posted on: 20 December 2013 by 50connect editorial

Buying an annuity with your pension pot is the most important decision you'll make in your later years. Get it wrong and the consequences will be with you to the grave.

older manSmall wonder that Prime Minister David Cameron is a fan of “Team Nigella”, where staff perks appear to be lavish and out of control, like MP’s expenses used to be!

One of Nigella’s former assistants, Francesca Grillo, is now on trial with her sister, Elisabetta, for fraudulently spending nearly £700,000 on Nigel Lawson’s ex-husband Charles Saatchi’s company credit cards. It was revealed in court that Francesca had been on 18 holidays with Ms Lawson’s family – including New York, Los Angeles, Germany and the French Riviera – over a period of three and half years. (1)

One of the allegations in this alleged fraud is that Francesca’s monthly spending on the credit card provided by Mr Saatchi was around £48,000 compared to the normal staff level of around £4,000. (1)

The figures are mind-boggling and have little relation to the real world. Even in a post-chauvinist world, there aren’t too many husbands who wouldn’t question a wife’s monthly spending of £4,000 on her credit card, let along ten-times that.

There have always been exceptions to the real world. In the seventies, tennis star Ille Nastase grabbed the headlines with his response to the question as to why he hadn’t reported his wife’s credit card had been stolen: “Whoever has it, can’t possible spend more than her!”

It won’t just be the 30% of workers who have pension pots of less than £10,000 that will be astonished by the financial figures being bandied around Isleworth Crown Court and gasping “How the other half lives!” But it’s not the other half – it’s a tiny percentage that are able to live as though this recession and austerity hasn’t happened. (2)

Back to the real world – and Doomsday, the most important financial day of your life, the day you decided whether or not to buy an annuity with your pension pot. That’s the day that determines how you live the rest of your life. There’s no 21-day cancellation period when you buy an annuity.

If you are going to choose one day in your life to seek financial advise, that’s the day to choose. Get it wrong and you will live with the consequences forever.

A recent report by the Office of Fair Trading led Pensions Minister Steve Webb to declare: “For too long, private pension savers have been at the mercy of their pension provider.” Mr Webb recently published a consultation document on pension charges. (3)

But it’s the pension pot “doomsday” that needs to be highlighted, according to a recent Daily Telegraph investigation. By its very nature, you will have probably saved for your pension for decades with some financial company. Perhaps naively, when they offer an annual income annuity, you assume that’s the best deal around – and the best option. (4)

Never assume. What we have heard in the Saatchi trial supports John D Rockefeller’s view: “It is wrong to assume that men of immense wealth are always happy”.

The Daily Telegraph investigation found that half of the UK’s 20 major pension providers failed to show the various options for turning that pension pot into income. (4)

Around 400,000 will buy an annuity in 2013 – and around 20% of those will have a pension pot of more than £50,000, the level at which “drawdown” rather than annuity purchase should be seriously considered. “Drawdown” allows you to make withdrawals from your pension pot without the need to buy an annuity. (4)

It has been every saver’s right, since 2011, to leave their pension invested while taking an income. For most at 65, that income is capped at £7,080 for each £100,000 held – around £1,000 better than an annuity bought at that age. (4)

What is even more disturbing is that often the pension provider does not even offer the best annuity rate for your pension pot. A recent “Which” report concluded that standard annuity rates vary by as much as 10% - and almost 40% for those with poor health and lifestyle conditions. (5)

Making the pension provider aware of your precise health and circumstances at the time of purchase is crucial. Again, your financial adviser knows the best ways of getting the annuity that you are entitled to. Buying an annuity is not a decision to rush into without very careful consideration.

It is not only the physical impact of living on less money, it’s the mental stress of knowing that there’s no way of correcting the mistake.

But it’s not all bad news. A recent study by a major pension provider brought some Christmas cheer for those approaching retirement.

The headline announced “A happy retirement - yours for £11,000” (2)

In a survey by a pension provider of over 1,000 adults in the UK between 60-65, a happy retirement was declared as spending 468 hours on hobbies, 364 hours with grandchildren and 21 days abroad annually, while living in a detached countryside house with a garden. (2)

That group also want to retire at 65, with children and grandchildren living within a 24-mile radius! (2)

The precise cost is £10,820 and you will currently need a pension pot of £225,756 to fund this lifestyle for a 17-year retirement. The State Pension will provide just under half and you will require an additional £128,000 from your own pension pot. (2)

The essential part of that income is £7,623 – and the “happy” part is an extra £3,197. (2)

Many planning for retirement might have estimated they would have needed much more. It is clear that five years of recession and austerity has prompted those nearing pension age to focus on those things in life that cost little and matter most, like family and friends.

For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail info@wwfp.net or take a look at our website www.wwfp.net.

 

Sources:

  1. The Times – 12th December 2013 (Court Reporting)
  2. LV Pension Study
  3. Daily Telegraph – Steve Webb - 18th December 2013
  4. Telegraph Media Group – 14th December 2013
  5. ‘Which’ Annuity Report – November 2013

 

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