Are You Sitting On a Pension Gold Mine
Saturday 10th March 2012
By Teresa Hunter
Hundreds of thousands of savers don't realise that they are sitting on valuable pension guarantees that could double their income in retirement.
The Daily Telegraph has discovered that the overwhelming majority of personal pension plans sold before July 1 1988 included guaranteed annuity rates (GARs), which can be 100pc higher than current market annuity rates that have fallen to record lows. Such rates determine your level of income in retirement.
For example, a 65-year-old man might enjoy an annual income of around £11,000 in return for a £100,000 pension pot by using his valuable GAR rather than buying an annuity on the open market, where he would get only £5,900 a year today. Steve Wilson, an adviser at Alan Steel Asset Management, said: "Any pensions taken out before 1990 are highly likely to have a guaranteed annuity rate. Policyholders must check carefully, as these are now very valuable."
Phoenix has half a million of these policyholders, including savers with Pearl pension plans. Aviva has 80,000 via its old Provident Mutual, Norwich Union, Commercial Union and General Accident brands. Scottish Widows has 70,000, Scottish Life 47,000 and the Pru 60,000.
Yet the vast majority of customers are completely in the dark over these guarantees, largely because companies do not tell them that they exist...
...Before personal pensions were launched in 1988, those who wanted to save for retirement in a private pension, because they did not have access to a company scheme, took out a "retirement annuity contract", also known as a Section 226 policy. These savers included self-employed or freelance businessmen and professionals as well as contract and part-time employees, who were often not eligible to join occupational arrangements at the time.
It has now emerged that most of these contracts included a guaranteed annuity rate. Annuity rates then hovered around 15pc for a 65 year-old. In March 1988, for example, they were 14.9pc, peaking at 15.65pc in March 1991.
The guaranteed annuity rates included in these contracts were set conservatively compared with the prevailing annuity markets in the Nineties. Typically, a 60-year-old man might be guaranteed an annuity rate of 9pc, rising to perhaps 11pc at age 65 and 12.5pc at 70.
They were not a complete gift-horse, however, as there were restrictions about how they could be exercised. They might be available only on certain dates, early retirement was not usually permitted, and they had to be taken as non-index-linked annuities with no spouse's pension.
Some companies are more open than others, although even the good ones highlight the existence of GARs only when you are close to retirement....
How to safeguard your guarantee
It is vital to find out whether your pension has a guarantee in the first place, by contacting your pension company in writing.
As a general rule, if you started your pension before 1990 or it was a Section 226 policy or a with-profits contract, there is a good chance it has a guarantee. If you remain unsure, even after a response, contact a financial adviser who specialises in annuities.
Where there is a guarantee, get all the details of how it applies, to make sure you exercise it properly. Some guarantees were not particularly flexible, requiring them to be taken only on particular dates. If you try to retire early, transfer money elsewhere, or stop or cut contributions, benefits could be lost.
If you do discover that you have a guarantee, you should also establish whether you can pay more money in and still benefit from the guarantee. Most companies stopped taking lump sum investments into the contracts between 2003 and 2005.
However, it may still be possible to increase your regular premiums, at least a fraction....
Quote Courtesy of The Telegraph
Saturday 10th March2012
By Teresa Hunter