Investors need a better road map

In the last of a series on pensions, James Patterson questions the service provided by advisers

ARTICLES over the past few weeks have described the new income withdrawal facility contracts as an alternative to buying an annuity when an investor wishes to take the benefits from personal pension contracts.

One feature should be obvious - it is an extremely complex facility, with the potential for things to go sour if the investor makes the wrong choice. So what should the investor do to ensure he gets sound advice from his financial adviser, and what protection has the investor under the 1986 Financial Services Act and its regulations against poor advice?

The alternatives are buying an annuity straight away, or taking income from the contract and buying an annuity later.

Buying the annuity

Several things can go wrong, including:

q Buying the wrong type of annuity. For example, if the investor buys a level annuity and lives a long time in a period of high inflation, the real value of the annuity payments is continually eroded. This hazard has always been present when taking benefits from a personal pension, but the introduction of the income withdrawal facility has highlighted the danger.

q Buying an annuity when annuity rates are low because interest rates are low - the catalyst which brought about the income withdrawal facility. Interest rates, and consequently annuity rates, could subsequently rise, and the investor would have received a higher income had he or she waited.

q Buying an annuity from the wrong life company, when a higher annuity rate could have been obtained from another life company.

q Buying an annuity when the investor is in poor health. If the investor dies within a short time of buying the annuity, the annuity could die with him and there would then be nothing left of the pension savings to pass on to the next generation.

The potential faults are compounded because once an annuity has been bought, there is nothing the investor can do to limit the damage.

Taking income

The main potential danger here is that of depleting the fund through taking out too much income or from poor investment performance or both.

Should this happen, then the investor would be forced to limit the damage by taking much less income or buying an annuity with a depleted fund. With either course of action, the investor and dependants could face severe financial hardship.

So what can the investor do? Modern-day personal pension policies are written as a cluster of small individual contracts. The investor can take the benefits a bit at a time by cashing in a few of these contracts when required, leaving the remainder intact until later. This provides the investor with flexibility, whether buying the annuity or taking income.

An investor seeking to take benefits should not cash in all his contracts, but phase them out over a period. Above all, investors should ensure that their advisers explain the alternative options clearly and rationally:

If they are recommending buying an annuity, then the reasons should be spelt out. The Financial Services regulations require advisers to provide a "reason why" letter to clients, explaining the reasons for their advice.

Investors should note, however, that the Treasury often gets it wrong in forecasting interest rate movements, so do not expect infallibility from advisers.

Advising income withdrawal, the adviser should also set out the reasons, including the reason why not to buy an annuity at the present time.

The investor and his or her adviser should consider very carefully the amount of income to take and how to invest the remaining fund. The investor needs to check very carefully the investment advice given.

But above all, the investor should check with the adviser on the progress of the fund on various assumptions regarding investment returns and interest rate assumptions. As seen in previous articles, the level of income withdrawal is vulnerable to a fall in interest rates.

In this respect, the PIA (Personal Investment Authority), which is responsible for regulating the activities of investment advisers, whether independent or life company representatives, and of life companies, has to date only given rather general guidelines to advisers on dealing with income withdrawals. This consists of reminding advisers of the existing rules and warning them that they must highlight the dangers of depleting the fund if withdrawals are made.

However, illustrations of what can happen to benefits are still limited to the standard basis of assuming investment returns of 6, 9 and 12 per cent and using the life company's own expenses and charges.

The PIA needs to be much more specific in what it requires from members in dealing with clients - very much like its specific advice on dealing with transfers.

In particular, the investor should be provided with an illustration which shows, for a given level of income withdrawal, the investment return needed so that the fund is not depleted to the extent that income will fall later.

It is understood that the PIA is considering issuing more specific guidelines.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine