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
Sunday 23 May 2010
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.
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."
- 1 'Nasa Confirms Six Days of Darkness in December': No, they don't - it's a hoax
- 2 Canadian actor punched in face after 'Islamophobia' experiment goes wrong in wake of Ottawa shooting
- 3 Topshop at centre of row over body image as 'shocking' skinny mannequin photo goes viral
- 4 If you think Russell Brand’s new book is confused, you should read what his critics have to say about it
- 5 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
Pope Francis declares evolution and Big Bang theory are real and God is not 'a magician with a magic wand'
Huge surge in Ukip support after EU funding row, according to new poll
Ukip ‘exploiting grooming scandal’ to secure party’s first police chief
Nigel Farage: 'There’s nothing wrong with white people blacking up'
Maureen Lipman says 'she can't vote Labour while Ed Miliband is leader'
Muslims, immigration and teenage pregnancy: British people are ignorant about almost everything
iJobs Money & Business
£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...
£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...
£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
Day In a Page
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000