Get the best out of your pension pot

When you come to retire, it is important to be aware that you almost certainly do not have to take your retirement income from the same company that built up the fund in the first place.

Your money does not need to be locked up

You might ask why this is so important. After all, if you are satisfied with the way your fund has grown, why not let the same company pay your income? Well if you are using income drawdown (see below) this might make sense. But if you are buying an annuity, the considerations are very different, because the way annuities operate is very different from investments.

In fact they are almost the reverse, because with the exception of some new products that are appropriate only for those with large pension funds, most annuities ask you to give up your money completely, in return for a guaranteed income for life.

Of course, this is good, but it means that you are no longer participating in the investment market, so a company that specialises in growing your money, will not necessarily have the skills required to ensure you obtain the maximum possible annuity rate for your capital.

So most people need to think about what is called an “open market option”. Even those policies offering a guaranteed annuity rate for existing policyholders generally only do so at a fixed age and with no escalation or provision for a widow’s pension.

But surely I need a big fund to make this worthwhile?
According to Standard Life (quoted in Pension Insight magazine - August 2009) almost one in three people with funds maturing with them have a pot worth less than £5,000. A further fifth have pension pots worth between £5,000 and £10,000.

However, even at this level – and most readers of this article are likely to have much larger funds, the potential improvement in annual income from switching to a new provider can make it worthwhile.

Putting you in control of your income

Income drawdown
For those with larger funds – the actual level will vary from person to person depending on attitude towards risk and whether alternative sources of income are available – drawing an income directly from the fund can be an option. After taking any “tax free” cash required (up to 25% of the fund, just as when you buy an annuity) you can, until age 75, take money from the fund from as little as nothing each year up to 120% of the annuity that a person of the same gender and age could buy.

The benefit of this is that you are still fully invested in the same asset classes as before you retired, so if you like stocks and shares, you can stick with them, rather than giving up all your cash.

Are there any limits
At the moment, you can access your pension from age 50, but this increases to age 55 on 6th April 2010. If you decide to draw an income directly from the fund, you can only do so until you are 74. At age 75, you must either buy an annuity or use what is called an alternatively secured pension. These latter are highly inflexible and you should ask your financial adviser for details of the rules, if you are interested.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

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