Can inertia secure better retirement incomes?

 Source: Money Marketing, by Mark Pearson

 

A key part of the automatic enrolment ideology is that employee inertia will result in their accrual of a pension fund. While this may help the government drive people into saving, the same inertia is presumably a factor in a third of all retirees taking the annuity offered by their current pension provider without shopping around.

The Government’s aim is for individuals to create an additional pension pot and bolster their state pension entitlement, which is only likely to reduce in the future due to the effect of our ageing population. A pension pot on its own will not suffice; at some stage it must be used to provide an income.

By 2018, the introduction of automatic enrolment is expected to create an influx of 11 million new pension savers. The knock on effect is projected to treble the size of the annuity market and it is essential the annuity market properly services these customers.

In its recent consultation, ‘Better workplace pensions: a consultation on charging’, the DWP demonstrated in its four client scenarios that the lifetime effect of reducing annual management charges from, say, 1.00 per cent to 0.75 per cent resulted in a increased fund value of between 3.2 and 8.4 per cent.

In light of this, it is surprising to discover how comparitively little attention is focused on the fact that, according to the NAPF and Pensions Institute, between £500m and £1bn in lifetime income is estimated to be lost each year as a result of savers being tied into annuity rates which are not market leading. This could represent up to 8 per cent of the annual annuity market.

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The dangers of pension liberation

Source: Money Market

If you have money worries and a huge pension pot sitting in a bank account, releasing it is tempting; this is bad news

 

Seems an attractive option for people with cash worries; there are big charges

 

If you have money worries or unpaid debts it can be frustrating to have a lot of money tied up in your pension, but think twice before trying to unlock the cash.

You can’t touch your company or personal pension until age 55, but some rogue advisers have been promoting a way of getting at your money before then, called ‘pensions liberation’. This can seem an attractive option for people with severe money problems, but hefty charges and tax penalties could end up wiping out all of your pension pot.

Under pensions liberation, an unregulated adviser will typically take control of your entire pension, convert it into a bond, then lend half the money back to you as cash. You will have to pay both the loan and interest in full before you retire. The adviser may call it a ‘pension loan’, falsely claiming you are only ‘borrowing’ the money in your pot.

City regulator the Financial Conduct Authority has warned that any scheme offering to help you release cash from your pension before age 55 “is almost certainly a scam”.

It may sound attractive to people in financial hardship, but the huge charges and potential tax penalties can wipe out your entire fund, says Andrew Tully at retirement specialists MGM Advantage. “The companies behind these typically charge huge fees, between 20% and 50% of your pension fund’s value. Even worse, if HM Revenue & Customs find out you have taken out one of these unauthorised schemes, they could hit you with a tax penalty of up to 70% of your money.”

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Drawdown rule changes could cost pensioners

Pensioners taking income drawdown could see hundreds of pounds knocked off their annual income as soon as April next year.

The news that yet more changes are in store for people opting to draw a flexible income out of their pension pot will come as a blow, as the Government has already chopped and changed the rules twice in the past two years.

A 65-year-old male with a £100,000 pension pot who agreed his drawdown rate before 26 March this year generates £5,800 of income a year. In January, the Government confirmed that anyone agreeing income drawdown after this date would be eligible for 20 per cent more income and could take £6,960 out of their pot each year.

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Budget 13: Govt commissions fundamental drawdown review

The Government is considering changing investment rules to allow pension schemes to invest in unused space in commercial properties which may be converted for residential use.

If the Government went ahead with the change it would mean pension schemes would be able to invest directly in residential property for the first time.

Have a look at the full article from Money Marketing.

FSA mandates inflation-adjusted projections for pensions

Providers will be required to show customers the impact inflation could have on investment returns despite concerns the move could lead to a drop in pension sales.

The new rule, which will apply to generic and personalised pension illustrations for both personal and stakeholder schemes from April 2014, is being introduced by the FSA after research conducted by the regulator suggested customers found this approach easier to understand.

The FSA says several respondents to the consultation raised concerns pension sales could suffer as a result because they would appear to be worse value than products where illustrations are based on nominal returns.

The regulator will attempt to mitigate this concern by introducing a rule requiring companies to publish a statement about the effect of price inflation on other savings and investment products.

Drawdown providers will not be required to publish inflation-adjusted projections, although the FSA hints it will investigate whether this should happen in the future.

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