According to David Shearn of the Bristol accountants J & A W Sully, one result is that widows may find they have no continuing income from their husbands' personal pensions after death.
'Most people assume that personal pensions are like ordinary company pension schemes, where a widow's pension is paid automatically,' he says. But the surviving spouse will generally receive nothing, if the partner has chosen a standard single- life annuity.
Under the tax rules, only a limited amount of the money built up in a personal pension or an old-style Section 226 policy may be taken on retirement as a tax-free lump sum. Instead most of the fund must be used to buy an annuity (an arrangement whereby a capital sum is exchanged for a regular source of income for life). At its simplest, the business of arranging an annuity involves predicting the likely number of years you have left to live. Perhaps not surprisingly, therefore, many people prefer not to investigate the subject too deeply.
Once a lump sum has been exchanged for an annuity, however, the decision is irreversible. This suggests that buying an annuity should be undertaken even more carefully than most financial transactions. There are a number of alternatives. A simple level annuity, witha fixed sum payable until your death, is likely to offer the best initial rates. A refinement is an annuity that increases the payment annually, typically by 5 per cent. Another possibility is to opt for a guaranteed annuity, whereby the provider is committed to pay income for a set number of years (often five) to your estate if you die within this period.
The tax rules also permit you to arrange for your spouse to continue to receive annuity income (if desired, at a reduced level) from your personal pension until his or her own death. However, Mr Shearn fears this alternative is not sufficiently publicised. He describes the case of one of his clients, a taxi driver, who was advised by his insurance company to choose a five-year guaranteed annuity linked only to his life. 'He saw a very inexperienced lad at the desk who said, 'This is what you can take.' He wasn't advised he could take a joint life pension,' Mr Shearn says. As a result, once the five-year guaranteed period is up, the man's wife will receive nothing if she survives her husband.
'Something should be done to protect future pensioners,' Mr Shearn says. 'We would like to see a disclaimer to be signed by the policyholder if the surviving spouse is to be excluded, on the lines 'I fully understand that my husband or wife will receive no pension provision in the event of my death'.'
Personal pension policy holders also need to bear in mind that the annuity rates offered by their own insurance companies will not necessarily be the best value. Although most people purchase their annuities from their own pension companies, this loyalty may be misplaced. It is frequently possible to improve your pension by taking your accumulated fund to another annuity provider. Most of the larger insurance companies offer the option without penalty.
'Always look at the open-market option,' advises Robert Jackson, director of the independent intermediaries Baronworth. 'The annuity market is constantly changing and the company at the top of the table today may be half-way down the list in a month's time.' Given that annuity income is for life, even a small difference in rates can be extremely important over the years of retirement.
'A lot of people take out pensions through tied agents, and I don't think they would necessarily know about the open-market option. They are the ones who are really vulnerable,' Mr Jackson says. 'Before they sign up for an annuity with their salesman, they should go to an IFA (independent financial adviser) to see whether better returns are on offer.'
Policy holders with pre-1988 Section 226 retirement plans should be aware, however, that such a policy will automatically be converted to a new-style personal pension if you buy an annuity elsewhere. This could reduce the size of the tax-free lump-sum available.
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