29th October 2013
Half of those over the age of 50 have no idea how to swap their nest egg for a pension income when they retire according to new research writes Philip Scott.
Research from retirement specialist LV= reveals that millions of Britain’s over-50s are unaware of how they can draw an income from their pension fund. Whilst three in four, at 74% of this group already have private pension savings, almost half at 47% admit that they are not familiar with, and have not heard of any of the retirement income products available.
A traditional annuity, what a saver receives in exchange for a pension pot, proved to be the most well-known product with 49% saying that they had heard of one. Income drawdown and fixed term annuities were the next most familiar products, however only around one in five, at 19% have heard of them.
Industry figures indicate that retirees can receive an income of up to 40% higher if they have a health condition but just one in eight at 16% realise that they could qualify for an increased income if they disclosed health and lifestyle factors to an annuity provider. Only 10% of over-50s are aware of the idea of an ‘enhanced annuity’.
Retirees can choose how and when they start to receive an income from their pension fund but the study found that just 14% know that they do not have to purchase an annuity as soon as they retire. Only 11% knew that they would have to purchase a joint life annuity in order for their spouse to continue receiving an income, if they passed away. Fewer than 10% realise that opting for an income drawdown product means that as their pension fund remains invested it can be paid out to the person of their choice when they are no longer around.
LV= head of retirement propositions Phil Brown says: “The majority of people when they reach retirement age still take out an annuity with the company they have saved their pension with, but this often offers poor value. Initiatives like the ABI’s recently launched Annuity Window highlight the importance of shopping around, not only for the best rate, but for the most appropriate product. There are thousands of people coming up to retirement every week and, although today’s retirees have greater choice about how and when they take their retirement income, it’s clear that many are not aware of their options or what they could be entitled to.”
The gulf between the best and worst pension provider annuity rates was further highlighted earlier this year as insurance firms must now disclose deals on the Association of British Insurer’s – their own trade body’s – website.
With the new guide, dubbed the Annuity Window, the Association of British Insurers, is forcing its member life insurance companies to publish in the public domain how much they pay out in annuities. (To see the table visit www.abi.org.uk/annuities).
READ MORE: How much do you need to save into a pension?
Over 400,000 people buy an annuity each year, and getting the right deal can mean thousands of pounds more income during retirement. The introduction of this annuity tool, further highlights to pension savers they must shop around, or use the so-called ‘Open-Market Option’ when looking to exchange their nest-egg, as there can be a significant gulf between the best and worst rates.
Brown adds: “Unlike other major financial decisions, once someone chooses how to structure their retirement income, they can’t typically review their decision further down line. To ensure retirees are able to maximise their pension funds, it’s crucial that they select the solution that offers them the level of income and flexibility they need rather than simply opt for the product with which they are most familiar.
“We would always recommend that people seek specialist independent financial advice, to consider all the options available. There are lots of different ways to structure retirement income but many won’t be aware of these options unless they seek advice.”