A lot of little pensions...one big question

Chiara Cavaglieri and Julian Knight on how job-hoppers can rearrange the deckchairs if they have funds that won't buy an annuity

Many of us will have two or three careers during our working lives, and that could mean we head into retirement with a number of different pensions, both workplace and personal. This has the advantage of diversification – of spreading our investment risk. But there are also downsides, particularly in terms of converting these retirement funds into an annuity – the income for life we must all have taken out by the age of 75.

"The problem is that many insurance companies won't offer annuities to people with less than £10,000 in a pension pot," says Tom McPhail, head of pensions research at independent financial adviser (IFA) Hargreaves Lansdown. The answer, he adds, could be to combine all the little pensions as this will make it easier to buy an annuity. "Once it's over the magic £10,000 figure, the choice suddenly becomes very wide indeed. What's more, it will make the administration leading up to retirement much easier."

The disadvantage with consolidation is that you may have to trawl through some paperwork to combine all your pots into one, and penalties could be imposed by insurers for moving your money. "These are getting more unusual but on pensions taken out 10 or so years ago, there may be exit penalties of as high as 15 per cent. In such instances think very carefully before combining," adds Mr McPhail.

Another option is to take the pensions as individual lump sums. Since changes to pensions legislation introduced in April 2006, smaller funds that total less than 1 per cent of the standard lifetime allowance (which for 2008-09 is £1.65m) can be taken as cash. So anyone retiring now with a pension pot worth less than £16,500 can withdraw their money in this way, with 25 per cent tax-free and 75 per cent liable for income tax. In April, the start of the next financial year, the limit will rise to £17,500.

But it may well be that even those who are eligible for these lump sums will actually be better off taking out an annuity. "With interest rates at an all-time low, the interest earned on an individual savings account, say, would be minimal," says Joe Hill, director at IFA the Independent Life & Pensions Group. By contrast, he adds, "a male aged 65 can get an annuity rate of 6.6 to 7 per cent at present". This compares to an average return on a high-street savings account of around 1 per cent.

Remember, there is no obligation to buy an annuity from the same company that holds your pension. Indeed, your existing pension provider is unlikely to offer you the most competitive rates, so it is essential to scour the market for the best deal.

In addition, there are several factors that affect annuity returns, including medical conditions, where you live and your marital status. Smokers or diabetics, for example, may be eligible for "impaired life" annuities, which offer better rates because of the shorter life expectancy. Again the message from financial experts is to shop around for a policy.

But be warned: annuity rates are on the slide. According to financial analyst Moneyfacts, the average annual annuity income paid on a £10,000 pension pot has dropped from £638 to £597 in the past four months alone, and this is likely to get worse, at least in the short term. The main problem is the lower interest rates being paid by the Government on its bonds, which make up a key investment for insurers offering annuities. If low interest rates persist, the pay rate on annuities is likely to fall much further over the coming years.

One option for those worried about low rates is to pick a short-term annuity that lasts for five years, as opposed to the rest of the applicant's life. This approach will allow retirees to review their policy further down the line in the hope that they will be able to ride out the poor rates. "If in five years' time interest rates and gilt yields are higher than now, then combined with their higher age, this should enable people to lock into a higher rate," says Alistair Mellor, director at IFA the Financial Management Group.

However, this too is not without significant risk, and there is no guarantee that returns won't just drop further. "With ever-improving mortality rates," adds Mr Mellor, "annuity rates could be even lower than they are now."

Independent Partners: 10 top tips for retirement. Get your free guide here

Voices
A Russian hunter at the Medved bear-hunting lodge in Siberia
Save the tigerWildlife charities turn to those who kill animals to help save them
News
Davis says: 'My career has been about filling a niche - there were fewer short actors and fewer roles – but now I'm being offered all kinds of things'
PeopleWarwick Davis on Ricky Gervais, Harry Potter and his perfect role
News
i100
Sport
Frank Lampard will pass Billy Wright and equal Bobby Charton’s caps tally of 106 caps against
sportFormer Chelsea midfielder in Etihad stopgap before New York contract
PROMOTED VIDEO
Arts and Entertainment
The first film introduced Daniel Radcliffe to our screens, pictured here as he prepares to board the train to Hogwarts for the first time.
booksHow reading Harry Potter helps children grow up to be gay-friendly
Arts and Entertainment
A scene from Aladdin is performed at the Tony Awards in New York in June
theatreBrit producer Lythgoe makes kids' musical comedy a Los Angeles hit
Sport
Usain Bolt of Jamaica smiles and shakes hands with a competitor after Jamaica won their first heat in the men's 4x100m relay
sport
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Life and Style
A small bag of the drug Ecstasy
Health
Life and Style
Floral-print swim shorts, £26, by Topman, topman.com; sunglasses, £215, by Paul Smith, mpaulsmith.co.uk
FashionBag yourself the perfect pair
News
news
News
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
News
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
Extras
indybest
News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Financial Analyst - Forecasting - Yorkshire

    £300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

    Business Architect - Bristol - £500 per day

    £500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

    Regulatory Reporting-MI-Bank-Cardiff-£300/day

    £200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Day In a Page

    Save the Tiger: Meet the hunters tasked with protecting Russia's rare Amur tiger

    Hunters protect Russia's rare Amur tiger

    In an unusual move, wildlife charities have enlisted those who kill animals to help save them. Oliver Poole travels to Siberia to investigate
    Transfers: How has your club fared in summer sales?

    How has your club fared in summer sales?

    Who have bagged the bargain buys and who have landed the giant turkeys
    Warwick Davis: The British actor on Ricky Gervais, how the Harry Potter set became his office, and why he'd like to play a spy

    'I'm a realist; I know how hard this business is'

    Warwick Davis on Ricky Gervais, Harry Potter and his perfect role
    The best swim shorts for men: Bag yourself the perfect pair and make a splash this summer

    The best swim shorts for men

    Bag yourself the perfect pair and make a splash this summer
    Has Ukip’s Glastonbury branch really been possessed by the devil?

    Has Ukip’s Glastonbury branch really been possessed by the devil?

    Meet the couple blamed for bringing Lucifer into local politics
    Dress the Gaza situation up all you like, but the truth hurts

    Robert Fisk on Gaza conflict

    Dress the situation up all you like, but the truth hurts
    Save the tiger: Tiger, tiger burning less brightly as numbers plummet

    Tiger, tiger burning less brightly

    When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
    5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

    In grandfather's footsteps

    5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
    Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

    Martha Stewart has flying robot

    The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
    Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

    Do women cyclists need 'pootling lanes'?

    Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
    A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

    A tale of two presidents

    George W Bush downs his paintbrush to pen father’s life story
    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

    The dining car makes a comeback

    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
    Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

    Gallery rage

    How are institutions tackling the discomfort of overcrowding this summer?
    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

    Eye on the prize

    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
    Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

    Women's rugby

    Tamara Taylor adds fuel to the ire in quest to land World Cup