Do you know your pension fact from pension fiction?

Fiction: If I buy an annuity, all my money will go back to the insurer when I die.

Fact: This only happens if there are any funds left when you die and you don’t buy a guarantee to ensure payments are made for a fixed period of time.

According to the Association of British Insurers, 51% of all annuities are sold with a guarantee, while Retirement Advantage says its figures show 80% of advised customers buy a guarantee. Prior to the rule changes in April 2015, guarantees were capped at 10 years but they are now available up to 30.

Fiction: Income drawdown will give me a better income than an annuity.

Fact: Income drawdown allows you to choose how much income to take, so while you can take a higher income than would be achievable with an annuity, you are likely to eat into your capital and you may end up running out of money. With an annuity, your income is guaranteed, however long you live.

Fiction: My money is better off in my hands.

Fact: Just because you can take money out of your pension savings, it doesn’t mean you should. When you take money out of your pension, you could be stung with a hefty tax bill and lose valuable protection from income and inheritance tax.

This is particularly important if you don’t have a purpose for your money other than putting it in a savings account or investment fund, as these options are still available to you within your pension.

Fiction: I should buy my annuity from my pension provider.

Fact: No! Your ‘open market option’ allows you to shop around for the best deal, just as you do with your car insurance and savings accounts. This could boost your income by a typical 17%, according to the Financial Conduct Authority.

Fiction: I need to keep my health problems and vices under my hat.

Fact: Health problems may mean you pay more for life insurance, but those in poor health will get a better deal on annuities. This is because less healthy people are likely to have a lower life expectancy, so underwriters can pay a higher income. Specialist providers may also boost your income if you smoke, are overweight or have high blood pressure.


More about