Thousands of savers who reject annuities when they retire are missing out on valuable guaranteed benefits that won’t be offered by any other type of pension deal. In fact, some 60% of savers with guaranteed annuity rates (GARs) are not taking this income, according to analysis of Financial Conduct Authority data by the broker Hargreaves Lansdown (HL).
Around one in ten pension plans sold during the 1980s and 1990s featured a promise to pay an annuity income in retirement worth at least a minimum sum. Since the plans were sold at a time when annuity rates were far higher than today, these GARs were often generous. Typically, they promise an annual income on retirement of around 8% to 10% of the pension fund, compared with the 5.5% currently available in the standard annuity market.
However, since the pension freedom reforms of 2015, many people have rejected annuities in favour of income drawdown plans, where they either cash their funds in straight away, or take an income directly from their pension. In contrast, annuity sales have declined dramatically amid perceptions they offer poor value.
Many people don’t even realise their plan offers a GAR, particularly since official data suggests most people opting for drawdown are not taking independent financial advice, says HL. Savers who assume an annuity would offer a poor deal may be missing out on substantial sums they wouldn’t be able to generate through drawdown or by investing pensions cash elsewhere.
Check your policy
All savers with private pension plans should check their policies for GARs. Just keep in mind that accepting the guaranteed rate may not always be the right option. For example, some policies offer limited flexibility on the type of annuity available, which may make it more difficult for savers to protect spouses or dependants. However, it may be possible to renegotiate the terms of the guarantee. Where providers offer annuity benefits on a single-life basis, for example – where the income stops on the saver’s death – they may still offer an enhanced deal for couples who want the income to include benefits for the surviving spouse.
Another option, particularly for savers with larger funds, is to split up the savings. Some of the money could be used to capitalise on the GAR promise and secure a reliable income, while the remainder could be taken as cash or moved into a drawdown arrangement. If you’re in any doubt, take independent financial advice.
A one-stop pension-complaint shop
Amid widespread confusion among savers about how to seek redress for problems with their pensions, the government has now confirmed that all providers should refer people who complain to the Pension Ombudsman Service. The system applies to complaints about both occupational pension schemes at work and individual plans set up with a provider, such as a life insurer or a fund manager. The government’s intervention follows a shake-up of the rules on complaints earlier this year, under which responsibilities previously held by the Pensions Advisory Service were transferred to the Pensions Ombudsman scheme.
The ombudsman is now the only body with powers to consider people’s complaints about pension providers. Recent data from the Financial Conduct Authority (the City regulator) suggests there tend to be fewer complaints about pensions than other types of financial service, though cases are more likely to be resolved in favour of the complainant. Anyone who is unhappy with their pension provider must first make a complaint to the firm itself, giving the provider an opportunity to resolve the issue, but is then entitled to take their case to the ombudsman if they remain unhappy. The ombudsman’s rulings are binding on providers.
Tax tip of the week
The government’s new Help to Save scheme will give people on low incomes the chance to receive a 50% tax-free bonus on their savings, says Nikou Asgari in the Financial Times. Eligible savers can put between £1 and £50 every calendar month into a Help to Save account and collect the bonus after two years. If they carry on saving into the account after that, they can receive another 50% tax-free bonus after four years. There is no minimum or maximum number of deposits that can be made, as long as the amount put in doesn’t exceed £50 a month. The scheme will be open to UK residents receiving universal credit or working tax credit, depending on their monthly household income. Over four years, the maximum saved amount of £2,400 would attract a bonus of £1,200. After four years, the account will be closed.
Employer tax-relief mistakes could cost you
As many as half of all employers offering a pension scheme are making errors when submitting crucial information on behalf of their staff, meaning millions of people could be receiving the wrong amount of tax relief on their retirement savings. In a review of the data sent by pension providers and administrators, the Pensions Regulator has seen cases of employers claiming both too much tax relief on behalf of staff and too little. In the former case, HM Revenue & Customs has subsequently sought to reclaim overpaid tax relief, hitting savers’ pensions. In the latter cases, people are missing out on cash that could boost the value of their retirement benefits.
In many cases, the mistakes go back over many years and often never come to light, since there is no system for checking employers’ data returns. The regulator’s analysis suggests smaller firms without access to professional employee-benefits services are more likely to make mistakes – but many larger organisations have also made errors. For employees, spotting the mistakes can be difficult. However, it should be possible to make some approximate checks – such as whether the amount of tax relief your annual pension statement shows you have received on contributions tallies with the rate of income tax you pay. If in doubt, ask your pension scheme or personnel department for more details about what you receive and how calculations are made.