Sweeping changes to Britain’s pension system planned for the spring mean that most people who reach retirement will have some tricky decisions to make. At the moment, most people who save into a pension scheme end up turning their funds into a guaranteed income for the rest of their lives by buying an annuity.
From 6 April, annuities will no longer be the default option. Instead, it will be easier to leave pensions invested in the stock market, say, while taking a regular income – a process known as drawdown – or to take the whole fund as a cash lump sum.
The government has decided that the strict rules about using pension savings to generate retirement income are outdated, and that individuals should be given the freedom to decide for themselves how they will fund their later years.
While these changes have been broadly welcomed, they do in theory increase the scope for people to make poor financial decisions. For example, anyone who doesn’t use their pension to buy an annuity could face the risk that their money will run out at some point in their lifetime, leaving them to rely solely on any entitlement they have to the state pension.
Equally, there are potential downsides to taking out an annuity – rates are low at present, and there are a number of different types to choose from.
Given the sums of money involved, it makes sense to get some sort of guidance or advice when it comes to taking your pension. So what are your options?
Government-backed pensions advice
As part of its package of reforms, the coalition announced that everyone who reaches retirement on or after 6 April 2015 will be entitled to free guidance from a government-backed service.
This will be known as Pension Wise and it is expected to offer general information about retirement options on its website, over the phone or face to face through the Citizens Advice network. This will not, however, be specific advice about what people should do with their pensions. The Pension Wise service is running as a pilot scheme until 6 April.
Advice from your pension company
The firm which runs your pension should be able to offer you some general information about your options when you reach retirement age. It may offer a drawdown scheme as well as the chance to buy an annuity.
But remember that your pension provider is not impartial: it is in its interests that you do not take your money somewhere else, so it may try to encourage you to choose its drawdown scheme or annuity.
If you are planning to buy an annuity, it is important that you compare the rates offered by as many firms as possible – rates can vary to a huge degree and sticking with the offer made by your pension company could be a costly mistake.
Paying for financial advice
If you want impartial advice that is in your best interests, consider paying an independent financial adviser (IFA) to look at your situation.
Today, all IFAs should charge a fixed fee, agreed upfront, for the advice they give. This means they do not get commission on the products you end up buying, which means they have no financial incentive to recommend certain courses of action – something that has led to problems and mis-selling scandals in the past.
Advisers may charge a fixed hourly rate, or their fee could be linked to the amount of money in your pension.
To find an IFA in your area, visit the Unbiased directory, or seek recommendations from friends and family members.
An independent advisor is not a cheap option: it is likely to cost several hundred pounds. But it is worth weighing this initial investment up against the potential problems you could face if you get your pension decisions wrong.
Guidance versus advice
They may not seem very different terms, but in the financial world there is a stark contrast between guidance and advice. What this boils down to is that guidance is general information that could be given by a charity or the government, for example. Advice, on the other hand, entails someone telling you what you should do with your money, or recommending certain courses of action.
This form of advice should only be provided by an independent financial adviser. As a customer of a registered IFA you are protected by City watchdog the Financial Conduct Authority.
This means that if you are given advice that turns out to be wrong or misleading, you will be able to make a formal complaint and seek compensation without having to resort to the courts.