You may have come across yet more media coverage in relation to rip-off financial services. The story, like most has some truth to it, but some… well let’s just call a spade a spade…inflammatory errors. Here I shall attempt to briefly convey what the fuss is about in relation to annuities.

What is an annuity?

First off, what is an annuity? In short, its an income paid for life, most of the time paid like income (and taxable) every month. You can choose for it to stay the same (level) or rise each year (to keep pace with inflation). You effectively buy an annuity with your pension fund.

Are you getting a bad annuity deal?

Easy enough so far… so what’s the fuss about? In short, most people don’t shop around for the best deal in the belief that they wouldn’t get much more, or simply didn’t know they could. As a result many or most buy their annuity from the company their pension is with. In most instances they aren’t getting the best deal or anything like it.

A bit like Russian Roulette…

The main problem with buying an annuity is that you make your decision and have to stick with it for the rest of your life. It’s a one time deal. So any decent adviser will help you to think about the income you want well in advance of the day you decide. A financial planner will do this from the start (not just before you retire). So good planning is planning ahead and figuring out how best to tale your income and when, pensions and annuities are simply part of the picture, not the entire story.

There’s not much between them right?… wrong!

Is there really much difference? Yes. There is a massive difference. This will depend on how old you are, where you live, your life expectancy and your state of health. Bizarrely, the worse your health the better the annuity (as the annuity company won’t expect to pay it out for as long as someone with good health). Getting this part right alone could increase the income by 20%-50%. The message here is to shop around… however the reality is that this isn’t the whole truth, you really ought to use an IFA to do the shopping and set something up having discussed all of the options properly… in-line with your requirements and expectations about the future.

Planning ahead, understanding the bells and whistles

The bells and whistles… when you die the annuity stops. However you can have it pay in full or part to your spouse or your estate, you can put in guarantees. You can mix and match. You can delay. There are lots of things to think about and an IFA will do this, for a fee. This is money well spent and ultimately, if things go wrong the IFA is responsible for the advice (unlike a journalist or doing it yourself). The really important thing is to be engaged in the process and thinking about what you want your lifestyle to be in the future, when you do eventually get to the point when you can decide if you want to work or not.

One trick pony?

Annuities have their problems for sure and there are other options, but I wont drone on any longer. You give yourself more options by seeking independent advice from a financial planner, who will work to keep as many options open for you as possible (and sensible).

Please send me your questions!

That wasn’t so bad was it… any questions?

Dominic Thomas: Solomons IFA

What’s your pension really worth? Dispatches on Channel 4 last night

What’s your pension really worth?

Michael Buerk, still working at 67 fronted the Channel 4 Dispatches programme asks what pensions are really worth. The programme which was shown last night can be viewed online. Sadly it was fairly predictable, with headline statements and little helpful information.

The Lifestyle You Want

The programme began asking what three people expect from their pensions – in terms of the income that they need to have the lifestyle that they want, speaking to an “expert” they come up with some rather all-too simplistic “numbers” in terms of how much they need to pay in. This is what I might generously describe as an impoverished discussion. The only message that was conveyed really was that you need to figure out how much you need and start saving early.

Options and Choices

The question was posed about annuities and the appalling number of people that do not shop around for the best deal. I have every sympathy, but also wonder what it takes for people to realise that that they always have a choice. There was a sorry tale of a man that had a small pension pot (£29,000) and he bought a single life annuity from Scottish life, he then died and the annuity stopped. The family were surprised. I have to say that Scottish Life were incredibly generous in offering to alter the annuity to a joint-life annuity retrospectively. Brownie points to them. However some couples really need to think a lot more carefully about decisions that effect them both and not simply leave it to the other to “sort it out”. Which is why I do not see couples separately.

What About Proper Planning?

Despite phoning around, Mr Buerk failed to really communicate the need for expert advice – from a financial planner who would engage with the income requirements into the future and all of the options. Simply phoning around for the best deal is not good enough, it is better, but still grossly inadequate. Ros Altmann’s appearance was all too short, someone that genuinely understood the issues was not given sufficient air-time. This was typical lip service to educational information and rather more to do with headline grabbers.

Pensions Liberation is a Scam

There were further partial truths thrown in for good measure, a brief bit about pensions liberation – which breaches HMRC rules, so I would describe as illegal and yes it is possible to find someone somewhere to arrange one for the right fee (as with anything else). Frankly in the time available it would have been better to have had a separate show for this topic. Pension liberation can lead to complete financial wipe-out. It is a scam.

Pensions v Property (yawn)

So the alternative to pensions? Well thankfully the report didn’t suggest property purchases were the solution (other than the property expert). Property prices are baseless and fuelled by unsustainable debt. There was no mention of taxes, running costs, insurance etc all of which need consideration for using property as an investment. Certainly there is a place for it for some clients, but as part of the solution not the entire solution. In an ideal world your income in retirement is derived from several sources.

Education, Thinking and Planning

The programme ends with the challenge for us all to think about what we need and to consider how we are going to get there. Sadly no mention of the real “experts” to help with this process – financial planners like me. Who are not paid to sell products but to build a financial plan around real lives and real values. I wonder if the Government, regulator and media will ever get it?