How can pensioners avoid financial sharks desperate to grab a slice of their pension pot at retirement? What can and should they do with their money now the rules have changed? Over the next four weeks Guardian Money will examine the choices that retiring workers face, ranging from people with relatively low savings through to those who have built up large pension pots.
To start, let's look at an employee retiring on the average sized annuity. It may come as a surprise to many people that the figure is low - just pounds 40,000.
We gave financial advisers the same scenario, and asked what they would recommend. We told them that our individual is a man aged 67, who is entitled to the full state pension and has private pension savings totalling pounds 40,000. We said he is not a homeowner, but renting from a social landlord, and that he is a smoker, puffing 10 cigarettes a day.
Traditionally our man would have been advised to take the maximum tax-free cash lump sum. Anyone can have 25% of their pot as a tax-free sum - in his case this would be pounds 10,000. That would leave him pounds 30,000 to buy an annuity. We used the user-friendly annuity calculator at moneyadviceservice.org.uk, an independent service funded by the
It showed that for a 10-a-day smoker aged 67, the best annuity for pounds 30,000 in savings is from LV=, which would pay pounds 2,123 a year, or pounds 176.92 a month.
The first lesson here is how vital it is to shop around for an annuity, if that's what you want. The second is how bad the payouts are, even if you do shop around. Our smoker would have to survive 14 years just to get his own money back from LV=, rising to 17 years if he took his annuity from Prudential.
Given that half of long-term smokers in the
So what do our advisers recommend in the new, annuity-free world?
He recommends that our man takes the 25% tax-free lump sum, and accepts that the remaining 75% will be taxed if and when he withdraws it as a lump sum - maybe in stages to make sure his tax bill is minimised. "The net balance could then be kept in cash savings and spent over the next few years. There is a risk of living longer than expected, which would see this money running out and him falling back on his state pension, but as long as his lifestyle is affordable on this income, it is a sensible strategy to enjoy the wealth during his lifetime."
McPhail adds that with the pounds 10,000 tax-free lump sum our smoker should leave around half in cash on deposit, and "half in either a multi-manager fund or for a single fund like Artemis income, which is yielding 3.7% at present".
He recommends that our individual take the better annuity terms based on the fact he's a smoker, and that while pounds 2,200 a year from a pounds 30,000 investment doesn't sound much, it's equal to just over 7%, which is better than can be achieved on any savings account or risky equity fund.
"In the unlikely event that his state pension income exceeds or matches his outgoings, an alternative to an annuity, such as income drawdown, could be considered. This would allow him to alter his income as his non-essential spending dictated, while leaving his fund to a beneficiary (currently less 55% tax) or the full fund to a charity of his choice on death - something clearly not possible with an annuity."
Join the debate: Next week we look at a woman retiring at age 65 with a private pension pot of pounds 80,000 and a full state pension. Her husband, a former teacher, has already retired on a final-salary scheme paying pounds 18,000 a year. What would you do with the money? Suggestions to email@example.com.
An income of pounds 2,200 a year from an investment of pounds 30,000 is better than any savings account or risky fund
More than two-thirds of
Respondents typically thought they would need pounds 39,350 a year in retirement - way above the average pension income of pounds 14,376, financial services provider
Some 61% of those quizzed were worried they wouldn't have enough money for a comfortable retirement. Meanwhile, only 27% said they were planning to retire early - down from 34% in 2011 - and more than a quarter (26%) felt they would have to work past retirement age. Almost half (46%) review their retirement planning less than once a year.
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