Tuesday, 13 March 2012

Small print: huge pension boost

The Daily Express has been highlighting a common piece of small print, hidden away in many pensions, which means that pension holders may be entitled to a far higher pension than they think.

So what's the small print, and how can you claim?

The guarantees

The feature that's key here is the 'guaranteed annuity rate'. These are not in every pension contract - far from it - however, it's well worth checking if you have one, because in some instances it could double your monthly payment in retirement.

Guaranteed annuities used to be fairly common. Hidden away in the small print, they say that if you want, at the end of your period of saving, when you're hunting around for the best value annuity, they will guarantee you a certain level. 

The reason why they can be such a godsend is that many of the relevant pension contracts were written when annuity rates were very different. Back in the 1980s and early 1990s, annuity rates were 10% or more - so guarantees reflected this.

  • Get up to 40% more pension income

Since then a combination of life expectancy and record low interest rates mean they have crashed to 5.9% (which means your annual payment will be 5.9% of your total pension pot). It means someone with a guarantee could get twice the annual payment of someone without a guarantee.

Check it now

Ros Altmann, director general of Saga, told the Daily Express that pension providers are unlikely to honour the guarantee unless they asked about it. She said: "Unless you read the small print, or have an adviser, there is no one to tell you how valuable your Guaranteed Annuity Rate is."

Tom McPhail, head of pensions at Hargreaves Lansdown says: "Anyone with a pension set up in the mid 1990s or earlier should check their policy documents, or get an adviser to check them. If they don't have the documents any more they should contact the pension company and specifically ask about the guarantee."

He says this is worth doing, not just at retirement, but right now, to ensure you are making the right choices for your future. He explains: "You may have an old pension languishing somewhere and a new pension that you are pouring money into. However, you are never likely to get the investment growth from a new pension to match the benefits from an old one offering a guaranteed annuity rate of 8%, 9% or 10%, so they should channel pension savings down that route instead." 

1 comment:

  1. When it's time to retire, often your pension plan reaches maturity and you're faced with some decisions. A great option is to transfer its accumulated value into a pension annuity. It seems simple enough, but with all the options offered to investors, it's hard to know what's best.

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