Hunt out the best annuities
"I know you advise people to hunt around for the best deal when they are ready to draw their pension, but how do I go about this?
"Do I hunt first and ask the provider to deal with the company I have saved with, or do I need to go to a financial adviser, and if so will they charge for the service?"
Ask the Professionals: Francis Klonowski, principal of Klonowski & Co in Leeds, says:
You don’t have to use a financial adviser if all you want is the best annuity rate. They don’t have access to any special rates that you couldn’t access yourself – through an annuity comparison website, for example.
If you decide to pick one yourself, once you’ve made your choice, you complete and submit the application. It will include an instruction for your existing provider to transfer the funds to the annuity provider. Some ask you to send this direct to the existing provider, but most will do it for you as they have to complete their own regulatory details.
However, while you can do it yourself, an adviser may prove their worth in helping you decide between the different options, such as level or rising payments; guarantee periods; whether to include a spouse’s pension; and whether or not to take the tax-free cash.
They can also deal with the all-important, and increasingly complex, issues of impaired life/ enhanced annuities, which pay a higher than normal income if you have a health problem that threatens to reduce your lifespan or if you are overweight or smoke regularly. And, if you’re prepared to take some risk, they can also help you get your head round investment-linked contracts.
I believe it’s only right you should pay for such advice. Normally, the annuity provider pays a commission of 1% to the financial adviser, but you should consider using one who works on a fee basis. That means, if you go ahead with the annuity, they will usually offset the commission against the fees.
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.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
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.