As annuity complaints soar, it"s crucial that those subject to auto enrolment understand the options when they retire.
With the advent of auto enrolment, more and more people will be retiring with a pension. But simply having a pension isn"t the end of the story if people want to maximise their retirement income.
On retirement, it's up to people to turn their pension savings into an income. There are a number of ways that this can be done and what suits one person may not suit another, as it depends upon multiple factors such as the amount saved, the type of pension and life expectancy. People have always had an element of freedom as to what they did with their pension pot, but since April this year, people now have even more choice. Now, depending upon their particular pension, they may have the option to choose from:
- Delaying their pension: By delaying taking their pension, people can let their tax-free pension pot continue to grow, potentially providing a greater income once taken
- Flexi-access drawdown: This is where up to 25% of the pension pot is withdrawn as a lump sum, with the remainder being invested to provide a taxable income. Differs from an annuity in that the income isn't guaranteed for life.
- Take cash as and when: This is effectively using your pension pot as a savings account, taking out cash when you need it. Often has more tax implications than other options.
- Annuity: Perhaps the most well-known of options, offers up to 25% as a tax-free lump sum with the rest converted into an annuity, which is a taxable guaranteed income for life. There are a multitude of options including providing an income for a beneficiary if you die.
This flexibility obviously gives people much more freedom to do what they want with their pension pot. Previously the only real option was an annuity. However, with this new plethora of options, could come confusion. Complaints about annuities alone in 2014/15 rose by a staggering 29% according to the Financial Ombudsman Service Annual Review 2014/15, published in May, mostly complaining that they had not been made fully aware of their options to shop around for the best rate. What will happen when we begin to see more and more people retiring with even more options for their pension pot?
Auto enrolment will see more and more people retiring with a pension, but it's vital that they are given all the information they need to ensure they make the right choice for their retirement.