One of the key proposals is that people over the age of 55 will be able to take what they want from their pension pot, when they want it and without limit. Despite talk of Lamborghinis, we believe most people will only take out a sensible amount from their pension, so they can pay their bills and that it doesn’t ‘die’ before they do.
The most popular way of turning an income into a pension is an Annuity and many people, who want a guaranteed income for life, with no investment risk, will still select this option. However, other people may decide to take advantage of the new rules and plump for an alternative to an Annuity.
But, if you have recently bought an Annuity? Are you stuck with it? What are your options?
Read on and we reveal all.
1. First things first, should you change your mind?
If you bought an Annuity because you wanted a guaranteed income, which will pay out for the rest of your life, and possibly that of your spouse or partner, then it is likely that the Annuity is still right for you.
All other retirement income options carry a degree of capital risk or the possibility your income will fall, if you are not prepared to accept these, then an Annuity is probably more appropriate.
However, if you have a small pension pot, or like the idea of a being able to increase and decrease your income, then it may be worth looking at alternatives; but how can you do this if you have recently bought an Annuity?
2. Are you still within the ‘cooling off’ period?
Whenever you buy an Annuity, you have a period of time which you can cancel the purchase, known as the ‘cooling off’ period; unhelpfully each Annuity provider works differently.
There is no standard ‘cooling off’ period; some insurers allow you 14 days, others up to 30. Furthermore there is no consistency to the day on which your ‘cooling off’ period starts, with some providers it is the date you accepted a quote, with others it starts on the date of your policy document.
Since the announcement, many Annuity providers have generously extended the cooling off period to 45 or even 60 days, to help give people more time to make a careful decision.
If you are outside the ‘cooling off’ period you won’t be able to change your Annuity and you will have to continue as planned. Alternatively, if you are within the allotted time, you could look at alternatives, but there are other things you need to remember.
3. Will your old pension provider accept the money back
Even if you ‘cool off’ and cancel your Annuity, your previous pension provider, also known as the ‘ceding scheme’, does not have to accept the money back; leaving you with effectively no other choice than to buy the Annuity as planned.
We’ve seen cases of exactly this, the investor wants to cool off, but the ceding scheme refuses to take the money back, leaving no option other than to stick with the original Annuity and no opportunity to take advantage of the new proposals.
4. Tax-free cash
If you are still within your ‘cooling off’ period and your previous pension provider will accept the money back, you need to remember that you will also have to repay your tax-free lump sum to complete the ‘unwinding process’.
5. Beware short-term investments
If you managed to successfully ‘cool off’ and your money is returned to your previous pension provider, you obviously need to decide what to do next.
If you are one of those people, perhaps with a smaller pension fund, who wants to take the whole fund as a lump sum immediately after the 6th April 2015, then you need to be careful of short-term fluctuations in value.
If you will only be investing for a little over a year you really should consider avoiding any funds which could significantly fall in value. We’d suggest you consider using a Deposit or Cash based fund instead.
Sure, you won’t make much, in fact any growth will probably be wiped out by charges, but at least you won’t leave yourself exposed to falls in the stock-market just when you want the money out.
To put it another way, would you invest in the stock-market for a year? No. So think about sticking with Cash and Deposit funds.
6. What next?
If you ‘cool off’ but don’t want to take the whole find as a lump sum next year, what are your options?
You are of course essentially back to square one, your money is with your original pension provider and you need to start the whole process of considering your options and making difficult decisions.
Only this time you have a whole new set of proposed rules to include in your deliberations!
We are here to help
Whether you are already a client of Investment Sense, or you bought your Annuity through another firm of Independent Financial Advisers, Annuity brokers or even direct, we are here to help.
If you are concerned that you need to change your mind, would like to look at other options, or simply have a question about the proposed changes, our team of advisers is here to help.
If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email email@example.com