Play a better pensions game

Moira O'Neill

Play a better pensions game

An ex-City lawyer mum at the school gates says: "My husband and I used to have pensions. Now we don't. They're a rip-off." So they're venturing into the buy-to-let market. I warned that property is far from ideal as a pensions replacement, being illiquid and management intensive with no tax advantages.

However, interest in alternatives to pensions is growing as fast as the national press can come up with new 'pensions scandal' headlines. There are certainly many problems with pensions, not least that they are too complicated. However, for a higher-rate taxpayer there is no retirement savings vehicle that is more tax-efficient. So simply accept that you need to work especially hard to get the best deal in a pensions industry rife with overcharging.

A pension comes in two halves. One: building up your pension pot, and two: taking an income from that pot. The point at which you switch from stage one to stage two is the most critical financial decision most people make in their lifetime. But many investors concentrate on the accumulation process without realising that their 30 years of hard investment work could be in vain if a bad choice is made at retirement. And bad choices are plentiful, not least because a large proportion of people don't realise that they do have a choice - first between annuity and drawdown and second between annuity providers.

If you save all your working life with a pension provider, at retirement that provider will offer you an annuity (an annual income for life). One in three people take this first offer, not knowing that they can probably find a better annuity deal elsewhere.

It is not their fault - a damning report from the National Association of Pension Funds (NAPF) and Cass Business School has accused the annuity industry of using "murky pricing" and "sharp practices". The report headlines that private sector workers are being cheated out of up to £1 billion of their possible pension incomes by an industry that has managed to remain opaque about how it does its business and plays on the ignorance of the consumer base in order to profit from them.

The NAPF research found that high pension charges and the wrong choice of annuity could cut a saver's potential pension income by a quarter (24 per cent).

The report also showed that converting a pension pot into an income using the lowest rate quoted on open market annuity tables rather than the 'best buy' could reduce pension income by 12 per cent. Unfortunately, around a third of people fail to shop around for the best annuity, with many still unaware that they could qualify for enhanced rates due to medical or lifestyle conditions.

Getting the best annuity deal has become even more important now that annuity rates have been squashed by the Bank of England's decision to pump £50bn into the UK economy by way of quantitative easing (QE). Joanne Segars, chief executive of the NAPF, says: "Retirees who get locked into a weak annuity will find that the Bank's money printing leaves them out of pocket for the rest of their lives." Drawdown, the alternative to annuity purchase, will also be adversely affected by QE, with income levels held within tighter boundaries.

Facing downward pressure on annuity rates, it makes sense to get on with an annuity purchase sooner than later - in the longer term we may see rates recover, but this is a great unknown. You can use Investors Chronicle's annuity table here to see the best rates on offer.


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