How to make sure your pension won't go to pot

Mistrust of financial advisers means many pensioners rely on friends or family for advice. It could cost them an easy retirement. Alison Shepherd reports

A combination of increased longevity, record low interest rates and poor returns on government bonds means that it is harder than ever to make your pension pot spread across your retirement.

Nevertheless, as many as one in five people could be throwing away thousands which could make the final years of their lives more comfortable, simply by not taking the best advice on what to do with their pensions.

Research from Prudential shows around 19 per cent of soon-to-be-pensioners shun independent financial advisers (IFAs) and prefer the counsel of friends and family or their own internet research.

Vince Smith-Hughes, head of retirement income at Prudential, says: "There's no doubt that there is a wealth of useful information out there for people planning their retirement. But if people rely solely on this information to make a financial decision, it could lead to serious misdiagnosis, and people could end up making irreversible decisions that leave them financially disadvantaged."

The main problem for many pensioners is how best to invest their saved pension cash. Should it all be put into an annuity that will provide an income for their retirement years? Or should some of the pension pot be put into further investments to cover what, for one in four of us, will include the additional costs of a care home in old age. And then there's the question of planning in order to reduce inheritance tax.

Despite these factors, many people opt simply to take whatever annuity the pension provider offers, rather than exercising their right to search for the best deal under what's called the open market option. This, says Vicky Smith, of the charity Age UK, can cause problems down the line. "People are often not aware of the difference shopping around for your annuity can make, so they may choose what seems to be the easiest option. However, going with a different annuity provider other than your pension provider can increase your income by 20 per cent or sometimes more, particularly if you have a condition that may shorten your life and which ought to qualify you for a higher annuity rate."

Yet despite the threat of losing so much money and the fact that rule changes proposed by the coalition Government will end the compulsory purchase of an annuity by the age of 75, many people still refuse to approach an experienced expert. The option they can access could not only provide a bigger income, but will be more of a fit with the pensioner's needs, according to Martin Bamford, managing director of the IFA Informed Choice.

"Even an extra £1,000 a year adds up to a considerable amount of money over 20 years or more of retirement," he says. "Price comparison and best-buy tables are great for the basic annuity figures, but they ignore the suitability for each individual."

Mr Bamford recognises that his profession's reputation is one reason many people shy away from seeking its help. "There is still a massive misunderstanding as to what we do. Historically, and in some instances still, IFAs have been involved in mis-selling for the commissions. But many more have moved into the 21st century and have better qualifications. If people are unsure, ask around friends and family for a personal recommendation. That's always the best way to find an IFA."

The fear of being mis-sold by an adviser eager to pocket a huge commission from the policy provider should recede in future as, from 2012, the practice is being banned altogether. New rules introduced earlier this year by the Financial Services Authority (FSA) following the Retail Distribution Review will ban product providers paying a commission to independent advisers. And the advisers will have to spell out the cost of their advice and not bury fees in reduced investment returns or higher premiums.

According to Which?, one-off advice fees can range from £100 up to £500, depending on such factors as location, size of the consultancy, an individual IFA's qualifications and expertise, and the size of the investment. For ongoing advice work, typical hourly rates range between £100 and £150 per hour, although most IFAs offer a free initial consultation.

Yet many in the sector also fear that the idea of paying a fee for such advice puts people off as much as the concern that they are being sold something unsuitable because of the commission the adviser may be earning.

This, says Mr Smith-Hughes, is a suspicion that the industry has to overcome. "I firmly believe there's no substitute for expert professional financial advice. Like many services that require skill and a detailed knowledge of the market, financial advice does cost money."

One initiative that could help the public overcome their mistrust is the Money Guidance service, which Alistair Darling announced last year, and which the coalition this week confirmed it would continue to support.

A pilot of the programme, set up last year, is running in the North-west and North-east of England. Another 37 centres in the most financially vulnerable areas of the UK are being established this summer. The service does not give people specific advice, but it offers free guidance as to where detailed help can be obtained, including pointing people towards IFAs.

"The free service is a place people can get impartial and personal advice which gives them the confidence to find an IFA and ask the right questions of them," says Kate Humphris from the Consumer Financial Education Body (CFEB), which coordinates the scheme.

The service guide, who could be from a partner agency such as the Citizens Advice Bureau or the Consumer Credit Counselling Service, would go through what generic options were available. They would then point the client to where specific, individual help and advice could be obtained and what to expect, be it from a bank or an independent adviser. "This allows people to approach the professional of their choice and have an informed conversation about their needs. It's about giving people back the control of their finances," says Ms Humphris. The CFEB also runs a website: www.moneymadeclear.org.uk.

Expert View

Martin Bamford, Informed Choice

"There is still a massive misunderstanding as to what we do. There's a hangover from the days as being seen as nothing but financial salesmen," he says. "We're not seen in this way in Australia nor the US, where IFAs are treated much more as partners to be trusted, in the same way as accountants or solicitors," he says. "We still have a lot of work to do to reach that level of public perception. We are heading in the right direction and the momentum is with us to put things right."

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

PROMOTED VIDEO
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

    AIFMD Business Analyst / Consultant - Investment Management

    £450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

    Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

    £450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

    Manager - SAS - Data Warehouse - Banking

    £350 - £365 per day: Orgtel: Manager, SAS, Data Warehouse, Banking, Bristol - ...

    SQL DBA/Developer

    £500 per day: Harrington Starr: SQL DBA/Developer
 SQL, C#, VBA, Linux, SQL Se...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
    Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

    Lauded therapist still in limbo as battle to stay in Britain drags on

    Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
    Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

    Lewis Fry Richardson's weather forecasts changed the world...

    But could his predictions of war do the same?
    Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

    'I want to have contact with the audience, not iPhones'

    Kate Bush asks fans not to take photos at her London gigs
    Under-35s have rated gardening in their top five favourite leisure activities, but why?

    Young at hort

    Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
    Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

    Beyond a joke

    Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
    The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

    The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

    Sadly though, the Lawrence of Arabia star is not around to lend his own critique
    Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

    A wild night out

    Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
    Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

    Comic Sans for Cancer exhibition

    It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
    Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

    Besiktas vs Arsenal

    Five things we learnt from the Champions League first-leg tie
    Rory McIlroy a smash hit on the US talk show circuit

    Rory McIlroy a smash hit on the US talk show circuit

    As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
    Boy racer Max Verstappen stays relaxed over step up to Formula One

    Boy racer Max Verstappen stays relaxed over step up to F1

    The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
    Fear brings the enemies of Isis together at last

    Fear brings the enemies of Isis together at last

    But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn