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
Arts and Entertainment
glastonbury
News
i100
Arts and Entertainment
Shock of the news: Jake Gyllenhaal in ‘Nightcrawler’
filmReview: Gyllenhaal, in one of his finest performances, is funny, engaging and sinister all at once
Arts and Entertainment
Shelley Duvall stars in Stanley Kubrick's The Shining
filmCritic Kaleem Aftab picks his favourites for Halloween
News
people
Arts and Entertainment
Kit Harington has been given a huge pay rise to extend his contract as Jon Snow in Game of Thrones
tv
Life and Style
Taste the difference: Nell Frizzell tucks into a fry-up in Jesse's cafe in east London
food + drinkHow a bike accident left one woman living in a distorted world in which spices smell of old socks and muesli tastes like pork fat
Sport
Luke Shaw’s performance in the derby will be key to how his Manchester United side get on
footballBeating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Life and Style
Google's doodle celebrating Halloween 2014
tech
Arts and Entertainment
Don’t send in the clowns: masks and make-up conceal true facial expressions, thwarting our instinct to read people’s minds through their faces, as seen in ‘It’
filmThis Halloween, we ask what makes Ouija boards, demon dolls, and evil clowns so frightening?
News
peopleFarage challenges 'liberally biased' comedians to 'call him a narcissist'
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

    Finance Assistant - Part time - 9 month FTC

    £20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

    Marketing Manager

    £40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

    Market Risk Manager - Investment Banking - Mandarin Speaker

    £45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

    Compensation and Benefits Manager - Brentwood - Circa £60,000

    £60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

    Day In a Page

    The drugs revolution starts now as MPs agree its high time for change

    The drugs revolution starts now as MPs agree its high time for change

    Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
    The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

    Gotcha! The camera is turned on tabloid editors

    Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
    Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

    Fall of the Berlin Wall

    It was thanks to Gorbachev that this symbol of division fell
    Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

    What makes ouija boards and demon dolls scary?

    Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
    A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

    Rose Rouse's safari in modern Britain

    Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
    Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

    'My world of no smell and odd tastes'

    A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

    Matt Parker is proud of his square roots

    The "stand-up mathematician" is using comedy nights to preach maths to big audiences
    Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

    Paul Scholes column

    Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
    Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

    Frank Warren column

    Call me an old git, but I just can't see that there's a place for women’s boxing
    Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

    Adrian Heath's American dream...

    Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
    Simon Hart: Manchester City will rise again but they need to change their attitude

    Manchester City will rise again but they need to change their attitude

    Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
    Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

    A Syrian general speaks

    A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
    ‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

    ‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

    Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
    Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

    Fall of the Berlin Wall

    History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
    How to turn your mobile phone into easy money

    Turn your mobile phone into easy money

    There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes