Do you need retirement advice?
If you'll only take independent financial advice once in your life, there's a pretty convincing argument for holding off until you're about to retire and are faced with cobbling together a comfortable income from pensions, savings and any other assets you have.
Advice makes particular sense when you bear in mind that decisions made at that point are in many cases irrevocable and will determine how much money you have coming in for the rest of your life.
This argument has never looked more compelling than now. People retiring today have to contend with low annuity rates and poor recent pension fund performance against a backdrop of steadily rising life expectancy.
Recent research by Prudential shows that the expected average annual income for those retiring in 2013 is £15,300, compared with £18,700 for those retiring in 2008. Factoring in the impact of inflation over that period, someone who retired in 2012 would need an annual income of £21,400 to be as well off in real terms as they would have been had they retired in 2008.
Yet at the same time, there has never been greater choice in the retirement income arena.
It's not just a matter of shopping around in the open market for the best conventional annuity rate, but of deciding whether you want a guarantee giving you a minimum return, even if you die early; a rising rate that keeps pace with inflation; or a joint annuity that will support your spouse after you die.
Are you eligible for a higher "enhanced" annuity rate because of a medical condition or your postcode? Might income drawdown be an option for you?
Despite all this choice, people are becoming much less likely to take professional financial advice. Under the Retail Distribution Review that came into force in January, they'll now have to pay an adviser some form of fee, whereas previously they would have received an apparently "free" service, with the adviser being paid commission by the product provider.
Growing numbers of those about to retire are turning instead to non-advised annuity broker sites where they can learn about their options, compare a range of annuities and find the best rates.
Chris Millington, head of marketing at Key Retirement Solutions, reports "a huge increase in the volume of online annuity business over the past year".
For people looking at annuities, these services can work well, says Bob Bullivant, chief executive at Annuity Direct, which offers clients a choice of a non-advised or advisory service. "People need guidance to make a decision they are comfortable with, rather than specific recommendations."
The trouble is many of these broker websites promote their offering as a "free" service to the consumer on the grounds that there is no one-off payment to the broker and no direct deduction from the amount invested.
In reality, as everyone knows, nothing in this industry is free. Tom McPhail, head of pensions research at the biggest annuity broker, Hargreaves Lansdown, explains: "We will earn a one-off commission of 1.5 to 2% - typically around 1.7% - from the insurance company providing the annuity, and that is factored into the annuity rate paid to the customer."
For enhanced annuities, online brokers receive commission of up to 3.5% to reflect the additional work required of them and the higher rates received by clients.
McPhail emphasises that non-advised annuity services are, nonetheless, playing a valuable role. "For many people with smaller pots, the cost of advice outweighs the benefits gained by taking advice. They will be able to get the outcomes they need without having to pay directly for advice."
The advantages of taking advice depend very much on how much money you have and how complex your pension arrangements are.
As Billy Burrows, managing director at retirement income specialist Better Retirement, explains: "Those with relatively small pension pots of less than £75,000 do just need to find the highest income and a suitable annuity structure by searching across the market.
"Fat cats with £500,000 plus will have advisers crawling all over them anyway, so they will look after themselves. It's the people in the middle, with above-average pension pots who need a better service involving more sophistication than simply finding the highest payout."
Importantly, he adds, what many DIY annuity investors in this position - who are being seduced by the prospect of a "free" alternative - don't realise is that they would not be out of pocket if they did take specialist advice and might be considerably better off over time.
Ultimately, Burrows would like to see an end to commission on non-advised annuities, so consumers are able to make informed decisions about how to buy without running the risk they currently face of being misled by non-advisory broker websites.
He says: "Provided people receive a good level of guidance on the key issues and options, if that's what they want, or advice, if they prefer, that's the important thing. But at present, the common perception is that one service will cost them and another won't - and that's not good for outcomes."
Annuity service costs compared
Advisers will simply knock off the fee from the amount invested, if required.
In addition, there is no further annual charge for conventional annuities, no matter who they are bought through. For investment-linked products, there are annual management charges relating to the underlying funds. "We review the portfolio every year and receive a small annual fee from the insurance company, but there is not usually much to do, so we take very little," says Burrows.
Income drawdown requires a formal annual review and is therefore more expensive, he adds.
The Annuity Specialist, one of the few annuity services that is entirely advice based, charges a one-off fee (minimum £350) of up to 1.35% of the amount invested for standard annuities, up to 1.85% for an enhanced product and up to 2.5% for fixed-term or income drawdown. A £100,000 fund put into a guaranteed annuity would cost you no more than £1,350.
At Annuity Direct, advisory clients are charged in line with the firm's non-advised commission charges of around 1.8%, but with a minimum of £750 and cap of £2,500, regardless of pension size. Thus, a client with a £500,000 pot would pay only £2,500 for an advised service, compared with around £9,000 or more in commission on a non-advised equivalent.
Advisory fees at Better Retirement (which also provides a non-advised alternative for clients) are similar. Managing director Billy Burrows says clients will pay no more than £1,500 for a £100,000 pension pot split between, say, a standard and a with-profits annuity, and a maximum of £2,500, even on more expensive investment-linked arrangements.
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.