Make your pension work harder
Q: I want advice on how to top up my pension, but my adviser says I must pay a fee for this. Is there a way around this?
All independent financial advisers must now charge a fee when they provide advice about any type of investment product under new rules implemented as a result of the Retail Distribution Review, in force on 1 January.
This includes pensions, although if you just wanted advice about the suitability of your investments within an insured pension policy, your adviser could still provide this without an extra charge.
Bear in mind that advice was never truly free in the past. It was paid for out of charges deducted from pensions that were passed on to advisers in the form of commission. Paying for advice yourself is likely to be money well spent.
However, free advice is available on the web, from the government's Money Advice Service, for example. For an assessment of your current pension arrangements, you could try www.comparemypension.com.
Q: I have several past pension plans. Would it make sense to consolidate them in a SIPP?
It can make sense to consolidate past pensions in one place so that you have a clear idea of how much your total pension pot is worth and you can plan better for the future. However, the costs and benefits of transferring out of your existing schemes will need to be weighed up carefully if you are to avoid losing more than you gain.
It is rarely a good idea to transfer out of a final-salary pension scheme, while if you have with-profits personal pensions, there may be a penalty, such as a market value reduction factor, to take into account.
An older policy may include a guaranteed annuity rate that can be extremely valuable. There are several potential advantages to transferring into a SIPP, such as lower costs and access to better-performing investments. It is always a good idea to take professional advice before making any consolidations.
Q: Which providers offer low-cost SIPPs that permit shares and investment trusts?
More investment platforms are offering SIPPs that allow access to shares and investment trusts, although some still only permit open-ended funds. Charging structures are changing to reflect the new transparency requirements of the Retail Distribution Review.
Currently, low-cost SIPPs that allow investments in shares and investment trusts include those from Alliance Trust Savings, Bestinvest, Hargreaves Lansdown, Interactive Investor and Sippdeal.
Q: I am uncertain about investment markets. Can I hold cash in my SIPP?
You can hold cash, but interest rates on SIPP cash accounts tend to be low, so there is a danger inflation will erode the value of your fund. This is especially true with instant-access accounts. Higher rates may be available on fixed-rate bonds.
Q: I will start drawing my pension in 2013. When should I buy an annuity?
European legislation, implemented on 21 December 2012, now compels annuity providers to offer women the same rates as men. This means women will get a slightly higher rate and men a slightly lower one.
Remember to shop around. Let annuity providers know if you have any health problems, as you may qualify for a higher rate. It is best to seek professional help to find the best annuity rates.
With most annuity sales, a typical commission of 1.5% will be paid to the sales outlet.
Q: What are the alternatives to buying an annuity?
Bear in mind that several types of annuity are available. Some pay a fixed income, guaranteed for life. Others pay a lower income at outset but increase it at a fixed rate or in line with inflation.
Investment-linked annuities are also available.
Alternatively, you can opt for income drawdown, which enables you to leave your pension fund invested and take an income of up to the equivalent of the single-life annuity that somebody of the same age could purchase. This is likely to be raised to 120% of an equivalent annuity, perhaps in the next financial year.
However, if you are already receiving a secure pension income of at least £20,000 a year, you can choose flexible drawdown, which enables you to withdraw as much income as you want.
This article was written for our sister publication Money Observer.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
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.