Obliged to buy a pension annuity?
|Retirement | Pension Rules
Asked by normova, submitted
10 October 2011.
My husband has been paying into a private pension with Standard Life for the past 25 years, paying about £250 per month. He is self employed.
It is doing really badly: at the last review he would only get £3000 a year. He is 66 and plans to keep working because the anticipated pension is so poor, Even if he works till 75 he will only get around £5000 - that was until recently when we heard that people who have not yet sorted out an annuity might get a third less than three years ago!
My question is: does he HAVE to take out an annuity with the accrued money, or could he just get back the total cash sum he has invested?
I know you can shop around for annuities, and he might be eligible for an impaired life annuity because he had a heart attack eight years ago, but he feels that at £3000 a year he would never get "value for money" from the money he has paid into the pension.
Answered by Justin on 03 May 2012
Unfortunately it's not generally possible to take all of a pension fund as cash at retirement. The one exception is if you have overall pension rights (which includes the value of all your pension fund(s)) of less than £18,000 (for 2012/13 tax year), in which case you can withdraw it all subject to three quarters of the amount being taxed as income in the year you take it.
In your husband's case he can take up to a quarter of his pension fund as a tax-free lump sum, but the remainder must be used to provide a retirement income. The usual route is to buy an annuity, although it's possible to leave the money invested and draw an income instead (technically called an 'unsecured' pension).
Drawing an income can make sense if the pension pot is large enough to provide sufficient income while weathering difficult markets. But on smaller funds big market falls could leave too little money to sustain a reasonable income, making this approach too risky.
I'm afraid your husband has suffered from the double whammy of poor investment performance and falling annuity rates. The poor performance is likely due to falling stock markets while rising gilt prices have reduced annuity rates (as insurers buy these to back the annuities). Unfortunately it's been a vicious circle, as the key driver of rising gilt prices has been volatile stock markets...
High pension charges may also be a culprit, as they're generally quite horrific on pensions taken out 25 years ago - primarily due to the extortionate levels of pension sales commissions that prevailed in that era.
As you mention, his best bet will be to shop around for an impaired life annuity. It would certainly worth speaking to a few independent annuity brokers such as William Burroughs and MoneyMinder to compare quotes.
If you found this answer helpful, please add your vote by clicking here
Readers' Comments (0) - To post a comment please register or login