Roller-coaster stock market can present opportunities - Conal Gregory

This year’s roller-coaster of a stock market has worried many, not least those planning where best to place their pension pot. Money built up over decades to provide a comfortable retirement can quickly evaporate if not protected.

This year’s roller-coaster of a stock market has worried many.

The focus for many now is an annuity which has the certainty of payment whilst a drawdown pension may experience too much volatility and the worry that taking more than 3.5 per cent annually could mean the money runs out.

There is no point in opting for a drawdown scheme if you cannot sleep at night. From opening this year at 7542, the FTSE100 fell to 4994 on March 23, which was the lowest since 2011. Such volatility presents great opportunities but can unnerve investors.

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An annuity converts a lump sum into a retirement income for life. Do not forget that there is no requirement to use all the pension pot this way as a quarter can be taken as a tax-free cash sum to spend in any way at all. Some use it to move home, buy a special car, travel or to treat the family.

The balance can purchase an annuity. Never accept one offered by the firm used to build the pension pot without seeking alternative quotes which can vary by over 20 per cent. This is known as the Open Market Option.

A company which performs well in making a pension fund grow may not be at all competitive when it comes to providing an annuity. Quite often it will not have expertise in offering enhanced rates for those with health issues. Yet, despite great reasons for obtaining market comparisons, under half (49.6 per cent) actually buy an annuity from a non-pension provider.

Prudential was fined almost £24m by the FCA for failing to properly inform customers who were looking to turn their pension into an annuity. The company did not advise that a better deal with a rival provider might be available. This affected 17,240 customers and the Pru has paid £110m in redress.

Use an experienced specialist broker who will search the market for the most appropriate terms. This is normally free as their commission will be paid by the annuity provider.

There is a distinction between ‘advice’ and ‘non-advised’ which means guidance. Large and complex cases should be on an advisory basis. If a client prefers to make the decisions on what is right for them, the information should be supplied.

Leeds-based Age Partnership, a major annuity intermediary, stresses the benefits of shopping around. It suggests checking a firm is registered with the FCA to avoid a scam, is ‘whole of market’ (meaning it can obtain the best rates possible and is not restricted) and offers guidance.

If you do not wish to use all or part of the tax-free allowance, a ‘purchase life’ or ‘immediate’ annuity can also be obtained. This pays an income for life but the payments are only partially taxed.

Certainty of income comes at a price and annuity rates have taken a tumble. According to independent research by Moneyfacts, rates have fallen 11.9 per cent over 12 months and by a staggering 41 per cent in a decade. This is for a 64 year old male with a fixed payment and no guarantee, meaning no sum paid for death within five years of starting.

The number of new annuities shows how they have lost their popularity. The Association of British Insurers reveals that 465,524 annuities started in 2009 but only 64,966 last year. Currently there are 6.64m running with assets of £195,361m

There are various forms of annuity including:

Lifetime at fixed rate

Lifetime allowing for increase

Fixed term

Investment-linked

Consider if the policy is to be written for an individual or to include a partner. In the latter case, the joint life policy continues until both die. However, the annual payment is far lower (£307) than for an individual (£362) based on £10,000 purchase for a 60 year old. This is where there is no reduction on payments after the first death but if payment was then cut by one third, the opening rate would be £322.

Inflation can corrode the value of an annuity. To counter this, an ‘escalating’ income policy where payments rise by a fixed percentage or the RPI is the answer. Using the same example, the annual payment would start at £155 on average if based on five per cent compound or £185 if ROI-linked.

These are average rates obtained by Moneyfacts but there is a considerable variation. Location can make a distinct difference since mortality rates vary greatly between Glasgow and Kensington. Annuity actuaries pour over postcodes to adjust corresponding offers.

A fixed term plan provides more flexibility than a standard one and often comes with better rates. It provides a guaranteed income for a chosen period to suit the customer’s needs. In times of volatility, they can provide an effective stop gap solution.

LV=, formerly the Liverpool Victoria Friendly Society, offers only fixed term plans, most of which are for three to five years but are available up to 25 years. Nearly all its annuities have a death benefit which is the premium less income payments, which is not the case with lifetime policies.

Fixed term appeals to cautious retirees who are looking to ‘pause’ the major decisions and take a secure option because they are uncomfortable with the risk of investing in stock market based funds until the situation calms down.

Some providers specialise in offering enhanced annuities. This is for people who suffer from a range of lifestyle and medical conditions including more severe illnesses like cancer, diabetes, stroke and heart conditions. If in any doubt, seek such a quotation as once an annuity is accepted, it cannot be altered. It is a decision for the rest of your life.

A number of notable providers, like Hodge, do not offer an enhanced option. Some have the facility but the personal medical details may not fall within their medical criteria. Every provider is slightly different and policies are priced according to the risks accepted.

There used to be other forms of annuity including with-profits which provided a guaranteed level of income that could increase through with-profit bonuses. Aviva offered this until 2015. A variable version that gave a fixed sum which could increase through investing in stocks and shares was also offered.

For top performance, Moneyfacts has just awarded its top place for annuity provider to Legal & General and for annuity service to Just, formerly known as Just retirement.

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John Hooper, a retired IT specialist from Ossett, built up several pension funds including with ReAssure (now Phoenix) and Zurich. He spotted the annuity calculator on Age Partnership’s website and asked for quotations.

The Leeds-based broker obtained six annuity proposals for 66 years old John, who qualifies for an enhanced rate. There was an annual difference of over £545. He is divorced with two adult daughters and opted for a single lifetime rate with Legal & General.

“I would recommend Age Partnership. They are professional,” says John, who enjoys cycling, walking, reading and writing.

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