We save in a pension fund for years and get a lousy deal on charges and investment performance and then we get to retirement age and get ripped off again.
The Financial Conduct Authority has just caught up with one of the scams, which leaves up to 80% of pension savers worse off than they ought to be.
The practice currently under scrutiny is the annuity market.
When people come to pension age they are offered an annuity – a guaranteed pension for life based on the lump sum they have saved.
Currently a 65 year old can expect to get £6,020 per year if they have a £100,000 pension pot. If they want what they receive annually to increase in line with inflation, the amount they get to start with will be almost halved to £3,534.
Leave aside the fact that their pension pot has already been reduced by hefty charges that the government has decided not to police, the companies can choose to offer whatever income they want and most savers take it without asking any questions.
The annuity issues isn’t the only pensions rip off. The pensions industry is supposed to encourage people to shop around for the best annuity rate. But somehow about 70% of customers settle for the first quote offered.
One reason people don’t shop around is the tight schedule the companies impose. If you do not accept their annuity rate within 10 days it could be reduced. And as annuity rates have been falling for years this can be perceived as a real threat.
We need to get all the relevant information well ahead of retirement.
Pension companies argue that they have had to cut rates because we are all living too long. But you can change the odds in your favour.
- First of all if you have any medical conditions get written confirmation from your doctor. This can increase your annuity.
- If you smoke and have done so for at least two years get the doctor to confirm this in writing as well. It will increase the annuity payments.
- Then check which companies offer the best annuity rates. Most newspapers carry weekly annuity tables, they are also available online and you can telephone pension companies directly to get a quote.
- There are annuity brokers offering a similar service but if you use one of these check what the charge is up front. They usually charge a chunk of your lump sum and can end up being the main beneficiary of any improved pension.
- Most people take a pension at retirement age because they have no other income and also fear that their pension fund will decline if they leave the money invested and they will end up with a lower pension. But it is possible to leave the money invested and draw down from the pension fund without taking an annuity.
- There are limits on how much can be drawn and you need advice, but those with larger pension funds tend to take this option.
Annuities are a nice little earner for the pension companies and other pension professionals.
There is too little transparency about investment performance and charges and the actuarial tables that govern the pension pay outs.
After years of decline pension funds are showing gains on their investments but don’t get too excited.
In my own case my most recent pension statement showed that my pension pot had increased by 12%. But when I looked at the pension the company expected to pay me it had declined by 6%. It’s probably time to start smoking.