Many people facing difficult decisions about how to manage their finances in retirement will find the new pensions rules give them far greater flexibility and freedom. But the simple fact that new options are available does not mean taking advantage of them will be the best course of action for everybody.
Many pension products on the market at present may not be adapted as a result of the reforms, at least not in the short-term. Indeed, some of the rules and regulations are still being finalised and it would be too expensive for providers to update all their computer systems overnight when the changes come into force.
Those who wait are likely to find that two years down the line, they will have a much greater choice of products reflecting the rule changes. Acting in haste now and following the herd could leave some people feeling they want to switch to a new product again within a relatively short period.
Ask for advice before abandoning annuities
Some older pensions offer guaranteed annuity rates of up to 12%. In other words, they are guaranteed to let you buy an annuity worth £12,000 a year – for life – for every £100,000 in your pot. If you’re lucky enough to have such a pension, you should definitely think twice before giving up such a generous deal.
Even if you don’t have such a great deal, you may still find that an annuity remains a better choice than the alternatives, such as going into drawdown and leaving the majority of your pension invested. This is especially likely to be the case for people who are risk-averse, or who want total peace of mind during retirement that they have a secure income sorted for life.
If you’re in any doubt about what’s right for you, consider seeking advice from a financial adviser. Yes, you will have to pay a fee for doing so, but for most people this fee will be tiny in comparison with their retirement savings. And since many retirement decisions are irreversible – as is the case with most lifetime annuity products – the cost of not getting advice could end up being a lot more.
Think twice before transferring out of your final salary scheme
lf you have a defined benefit pension then you may still be able to take advantage of the extra freedom available under the new rules, by transferring your funds into a defined contribution scheme. However, this will usually mean giving up your benefits in the scheme in exchange for a cash lump sum that can be transferred to your new pension.
Before arranging such a transfer, you need to be absolutely clear whether such a move might be a good idea, based on a thorough analysis of your circumstances and retirement goals. Again, you should seriously consider consulting a financial adviser.
Staying in a defined benefit scheme is not risk-free, as your employer has to ensure there are sufficient funds to pay retired staff what they are entitled to. Nevertheless, around four out of five people with a defined benefit scheme are likely to find it will provide them with a suitable, guaranteed income for life.
Defined benefit schemes also nearly always include death in service payments to a spouse or partner if you die before reaching pensionable age and put all the investment risk on the employer.
Transferring out of a defined benefit pension means you choose to take on the investment risk yourself and in most cases that simply will not make sense.
Exceptions might include a married couple who each have a defined benefit scheme and would like to take the value out of one of them so they have cash to do things in the near future. However, what’s right for you will depend entirely upon your individual circumstances and priorities.
If you don’t yet have a financial adviser but are interested in finding one then you can find out more here.