Pension Myth Busting Part 2

September 2017
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Following Pension Awareness Week we are aiming to bust some common myths surrounding pensions. This article tackles myths regarding competing pension providers and enhanced annuities. 

Take a look at our first blog post if you haven't already seen it here.

Myth 3
“There is no point shopping around to get a better income out of a pension, as all pension companies offer similar deals. So I may as well stay with my current provider.”

This is certainly not true and shopping around, as well as exploring all the options is likely to leave retirees better off in most cases.

Some pension providers are better at offering contracts which are competitive when building up the funds. They do not all offer every option when it comes to drawing money out.

For example, if you want a fixed income for life, on a guaranteed basis, only 7 of the 50 odd companies who offer pension plans will provide this on a competitive tender basis, which is known as the open market option.

Similarly not all companies will offer the full range of drawdown options which give flexibility to draw out irregular amounts from your pension fund and to vary these.

This is likely to mean that many pension providers will not be offering the full range of options or the most competitive levels of guaranteed income.

All providers must allow you to move your fund to another plan so that you can shop around. This is called the open market option. Exercising it can make a real difference to the lifetime income paid from a pension fund.

Older contracts arranged before 2000, with companies no longer seeking new customers are those less likely to be competitive in the open market comparisons.

Some older contracts, do however offer valuable guaranteed levels of income as they were fixed in the 80s or 90s when interest rates were much higher.

Understanding what all the options are and how they can produce an income designed around individual needs is key to making the most of pension savings. Independent, whole of market advice can provide the answers and tailor the income withdrawals around personal needs.

Myth 4
“To qualify for an enhanced annuity you have to be seriously ill.”

It is true that if you are very fit and do not smoke or have any health issues, you are unlikely to qualify for an enhanced annuity. However over 60% of our clients do qualify for enhancements due to health or lifestyle issues which may reduce their life expectation, compared to the average person.

Enhanced annuities are well worth looking into if you or your partner have smoked, are overweight, take long term medication for common conditions, such as high blood pressure, raised cholesterol or suffer from chronic diseases. If you live in certain postcodes or had a job which exposed you to health risks, such as mining, farming or working with asbestos, you are likely to be able to get more income than someone of your age who does not.

The increase in income on offer will vary but can be between 10% and 30% more. Most people underestimate their eligibility for these uplifts in the lifetime income offered.

To access these terms a simple questionnaire needs to be completed and submitted via an independent whole of market adviser who will be able to obtain competitive terms from the provider market.

They will also be able to guide you on options such as buying regular increases in income, including an income for a spouse or partner and money back guarantees in the event of your death.

Special rules apply in the event that a terminal illness has been diagnosed. If life expectation is less than 12 months, the whole fund can be paid out immediately regardless of age. It is also possible to preserve the fund and pass it on to nominated individuals. Taxation of the fund differs in these circumstances and seeking professional advice is recommended.

Kay Ingram
Director of Public Policy, LEBC

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. 

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