News/Events

Taking your retirement benefits is not so simple now [18th February 08]

The whole notion of putting money to one side for a fixed retirement date and then converting your retirement fund to an income based or an attractive annuity rate is well behind us. Taking retirement benefits is no longer a simple one off transaction but it is likely to be much more complex and a phased event that will have to take into account many factors and considerations.

But, investing for retirement is becoming more important than ever because of:-

Dwindling state benefits

Without doubt the state provision will continue to fall in both absolute and real terms. Not only will the actual benefit fall in value but the state pension ages may again rise for both men and women.

Living longer

Everyone knows we are now living longer and for those who have reached 65, the average life expectancy is 16.9yrs for men and 19.7yrs for women. With this in mind, we are more likely to spend more time in ill health and no doubt the government will try and move the burden of healthcare provision from the state to the individual – more potential costs to cover?

Living Costs

Inflation will always corrode ones income in real terms which is, of course, compounded even further by living longer. A corollary is that by living longer, then annuity rates have fallen, giving a lower income, and these are not helped by lower interest rates and gilt yields.

The moral to this grim picture is to ensure your pension pot is being managed. In olden days, many personal pension products offered a limited range of funds probably managed by the company or by one of their investment subsidiaries.

Now with the explosive growth in the use of Self Invested Personal Pensions (SIPPs), you can now have a possible choice of over 1000 investment funds, link your fund to the new derivative – based products aiming for absolute return strategies with a cash plus benchmark or a maze of funds having “lifestyle” investing.

What action you take with your pension pot is probably the most important investment decision any of you will take and needs constant review. The move away from Defined Benefit schemes and perhaps a more mobile employment market will mean that many of those saving for their retirement will wish greater control over how their funds are invested.

Taking this one step further, the SIPP market is going to expand and become even bigger as Protected Rights contributions (funds built up from contracting-out of SERPs) will shortly be accepted as hitherto they have been excluded. 

The potential here is vast as many individuals have built up quite significant funds over the years since 1988 and are again invested in poor performing funds and not had too many options on trying to improve the returns. I have a few clients with current funds valued at over £100,000 and many with over £50,000. Only the other evening I saw a client who has, for many years, diverted his SERPs contributions into a With Profits Fund of a well known insurance company. They are paying an annual bonus of 2% (some pay no bonus at all) plus a possible terminal bonus, one of those bonuses that would or could be payable at maturity. Although we don’t know what state benefits will be payable or indeed when, I would say that he has little chance of matching these when the return in the current fund is so low. Not surprisingly my client is looking at the options available to try and get a real return on his fund and having his own SIPP is most definitely appealing with potentially 20 years to retirement.

You should be looking at your plans now and contacting your IFA for a review.

This article was written by Langtons - Published in the Western Morning News, This is Money, 18th February 2008