More than a million saversI have pension plans that offer a guarantee to pay an income for life that is between 5 and 10 times the return paid by even the best savings accountsII. But official figures show that nearly two-thirds of the people accessing pension money whose plans include a guaranteed annuity rate are choosing not to take it upIII.
Despite that, recent research suggests a third of people taking cash from pensions are stashing it in savings accounts currently paying rock-bottom ratesIV.
“If you are one of those aged over 55 who is thinking about taking some pension cash from a plan offering a generous guaranteed rate for life then you are very lucky – only about one in eight have this high performance option and giving it up could prove an expensive mistake,” said Stephen Lowe, group communications director at Just Retirement.
“When we researched what people could receive from a guaranteed annuity rate the typical income paid was between 9 per cent and 12 per cent but in some cases it topped 14 per cent. Pension providers made these promises when rates were higher and now have to honour them – their loss can be your gain.
“In fact the guarantees are so valuable that providers must tell you if your pension plan has one and, with bigger pension pots, you are compelled to take regulated advice if you are thinking of giving it up.
“Yet we know that many thousands each month are turning these high performance annuities – of those accessing pension benefits in the last three months of 2015 for example, more than 9,000 of the 15,000 whose plans offered a guarantee rate chose not to take it upIII.”
He said that rejection was far more likely among those with smaller pensions. Nearly nine in 10 of those with pensions worth less than £10,000 shunned the guaranteed annuity rate compared to about four in 10 of those with larger pension funds who have taken professional advice to explore which options are best for them.
“Pension choice only works if people are open-minded and think about all the options,” said Stephen Lowe. “It’s true that in the past customers who didn’t shop around often ended up with poor value annuities. That doesn’t mean people should automatically ignore all annuities.
“Some people have these very attractive guarantees rates. Many thousands more can access higher, personalised plans that take into account health and lifestyle factors and can be bought with capital protection built in to ensure a positive return on the money invested even if you don’t live to a great age.
“The key point is to thoroughly check the facts by finding out what annuity rate would apply to you and then to use that as a benchmark to test other options. You may be surprised.”
He said that being able to decide what to do with our own pension money is popular but also comes with responsibility to ensure we choose wisely by prioritising income over the long term.
“Most of us will need a firm foundation of guaranteed income from State and private pensions that we can use to pay the bills when we are no longer working and which we can rely on even in if the economy runs into problems. Once that is in place we can think about having some flexibility so we can spend, invest or give away the rest.
“True pension freedom is being able to use the pension money you have today knowing with certainty that more is on the way tomorrow and for as long as you need it.”
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