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If you are approaching pension age, unless you are one of the increasingly few with a salary-related pension scheme, you would be wise to take professional advice before you take any irrevocable action. The decisions taken at certain points in managing your pension will affect the whole of your retired life and may also impact on how much of your estate passes to your family.
Under the current pension system, those who have ‘money purchase’ type schemes will typically either take an annuity or manage their own pension fund using a Self-Invested Personal Pension (SIPP).
An annuity involves swapping your fund for an income for life (or a guaranteed period) for yourself and, if you wish, your spouse. Although there are options as to length of guarantee and indexation, once the annuity is purchased it is a done deal and cannot normally be amended. Annuities can also be higher where a health condition exists which is likely to shorten one’s life. The annuity rates quoted by the companies offering them vary quite a lot and a company that was highly competitive a few months ago may no longer be.
SIPPs are very flexible in comparison with annuities. They allow far more options as regards taking income or leaving the fund to grow, and include the popular ‘drawdown’ option, which has thus far allowed 1.5 million pension owners to access their pension pots in part. However, a SIPP will carry charges from the provider and is also likely to carry higher risk, as well as the potential for higher reward. Under a SIPP, the responsibility for managing the investments in the pension fund is passed to the pension holder.
A recent report by the Financial Conduct Authority has shown that nearly 60 per cent of people with pensions with drawdown had little idea where they were invested and 33 per cent had their entire pension in cash – which in most SIPPs means a zero rate of interest at best. The report concludes that pensioners are missing out on considerable potential income because of the amount of cash being held.