Almost half of adults positive about pension reform
Some 44% of UK adults say government reforms have made them feel more positive about pension schemes, according to the Association of Investment Companies (AIC).
From April 2015, changes to the pension rules will come into force, including greater access to small pensions, greater income drawdown freedom and relaxation of rules that required many retirees to purchase an annuity.
As a result of the changes, 26% of those who plan to retire said they were more inclined to increase their pension contributions.
The AIC research also found that individuals are aware of the need to plan for their long-term finances, as 59% of respondents who intend to retire believe that they will be in retirement for 20 years or more.
When asked why the new rules made them more positive about their pensions 70% were buoyed by having the flexibility to access their money should their circumstances change, while 60% were glad to have the flexibility to invest their money in other assets and withdraw cash as needed.
Some 57% felt annuities represented poor value for money and 35% of those who plan to retire said that they would not purchase an annuity. Another 27% said they didn't know how much of their pension they would invest in an annuity and just 2% said they would be willing to use their entire pension fund to buy one.
The majority of people surveyed by the AIC said they were put off annuities by several factors. Some 72% feared the impact of inflation on a level annuity, 67% didn't like being unable to pass anything on to their family or friends after their death and the same percentage were deterred by being unable to cancel an annuity at a later date.
Meanwhile, 53% thought the starting income for a level annuity was too low. And so too was that for an escalating annuity.
However, Mark Stopard, head of product development at annuity provider Partnership, said: “The typical amount used to purchase an annuity is currently around £30,000 – not very much when you consider a person taking out a policy at 65 could live for 20 or 30 years or more. Annuities are the only way to provide a guaranteed income for life – no matter how long someone lives – so we do expect to see more people placing a value in using these products to cover essential expenses.”
Commenting on the improved attitudes of people towards tehir pensions, Patrick Connolly, a certified financial planner at IFA Chase de Vere, added: "For many people the biggest drawback of pensions was the lack of flexibility and the perception that they couldn't access their money.
"The pension changes announced in the budget give people far more choice about how they can take their pension benefits and this is very much welcomed. These changes should encourage people to be more positive about their pensions.
"However, it is important to understand that to get the best returns from pension people need to start saving as early as they can and invest as much as they can. While there is more choice about how people can take their pensions, this also means there is more opportunity for them to make the wrong decisions. It therefore becomes even more important that when taking pension benefits, people also take independent financial advice."
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.