Don’t go it alone

Most dentists will have accumulated significant sums in pension arrangements by the time they reach retirement age. There will usually be some NHS Pension Scheme benefits but often the bulk of a dentist’s pension provision will have been accumulated in personal pensions.

Eventually the time comes for funds accumulated in pension plans to be used for their intended purpose; i.e. to provide income in retirement. There are many pitfalls for the unwary when the time comes to start taking an income from personal pension arrangements, but expert professional advice will ensure that you avoid them.

Before you do anything, you need to assess whether the value of all of your pension benefits when added together exceeds the £1.5m ‘Lifetime Allowance’. If the Lifetime Allowance is exceeded, there are some tax issues to deal with. It is relevant in more cases than you might imagine when you consider that an NHS Pension of £44,000 per annum, with a retirement lump sum of £132,000, is valued at over £1m by itself.

Next, you must decide how much of your accumulated funds can be taken as a tax-free lump sum. Usually this is 25% but it can sometimes be more and, where a higher entitlement exists, it can easily be lost if certain precautions are not taken.

Then you must look at generating income and usually most, or all, of the income provided by personal pensions is generated by exchanging the fund value for an annuity that provides a guaranteed income for life.

Annuities are sometimes criticised but most of that is unfair. For example, people sometimes worry that the insurance company will keep a large part of their annuity

purchase price if they die early but this is not the case.

Instead, any funds left when someone dies relatively young are used by the insurance company to pay income to those who live longer than average. In a paper published by HM Treasury in December 2006, the government made it clear that it is satisfied that annuities provide insurance against running out of income in retirement at a reasonable cost.

Alternatively, you might wish to purchase an annuity where the income is linked to investment returns. You might prefer to take withdrawals from some, or all, of your fund instead of exchanging it for a guaranteed income for life. Of course, when linking retirement income to investment returns, issues such as the risk of reducing income in the future due to inadequate investment performance must be considered.

If, like most people, some, or all, of your fund is to be used to purchase an annuity providing a guaranteed income for life, what next?

Professional advice is vital because there are so many issues to consider. At MIA, we have a specialist Retirement Income Service, staffed by advisers who spend all day every day assessing whether customers might be better off by taking benefits from their existing pension companies or by using the accumulated funds to purchase annuities on the open market.

The level of income offered in return for a given pension fund is called the annuity rate. For example, an annuity rate of 6% will provide £6,000 per annum for life in return for a pension fund of £100,000. Annuity rates are calculated to return the purchase price (the fund value) to you plus interest over an average life expectancy. Therefore, at any given time, an older person will get a higher rate than a younger person.

There are usually only a handful of insurance companies offering competitive annuity rates. Just like car insurance premiums, insurance companies continually adjust their annuity rates depending on whether they wish to attract new business. Companies that do not wish to attract annuity business or those closed to new business do not offer competitive annuity rates (but some of their older pension policies might have attractive annuity rates built in – see later).

It is unlikely that the company you selected to deal with your pension plan five, 10 or 20 years ago will happen to be offering the best annuity rate at the time you take

your benefits.

Do not underestimate the value of shopping around. While writing this, I looked at random at two cases we dealt with in the last few days. In one case, the annuity rate we found was 11.7% better than that offered by the company the pension was with. In the second case, the rate was 16.8% better. These are typical cases. In the second example, if someone used a pension fund of £50,000 to purchase the annuity offered by the old pension company without shopping around, they would effectively be throwing away income for life worth £8,400; 16.8% of £50,000. If they had built up £200,000, they would be throwing away £33,600.

What is the point in working hard throughout a career, making sacrifices to prudently save for retirement, only to waste a large portion of what you have managed to accumulate?

At MIA we have electronic access to the latest standard annuity rates offered by insurance companies, which means we can shop around for the best standard rates instantly. In addition to standard annuity rates, a number of insurance companies offer enhanced rates for people with certain health issues such as a history of circulatory or respiratory problems, diabetes, cancer etc. Also, people who are overweight or who smoke can sometimes obtain better annuity rates.

While the array of options can seem daunting, an adviser who deals with this subject all the time will very quickly enable you to decide on the most appropriate type of

annuity for you. Would you like an annuity that will continue for a spouse/partner if you die first? Would you like a level income for life or one that will start lower but increase? What about a guarantee that the income will be paid for a specified period of up to 10 years, even if you and your spouse/partner die before that period expires?

Last but not least, a professional adviser should check that your old pension plan does not contain some valuable guarantees or exit penalties. If you started your pension plan before the mid-1990s, and particularly if it started before July 1988, you might well find that it has valuable guaranteed annuity rates built into it.

These guaranteed rates can be 50% better than current rates and they can sometimes be difficult to uncover. Usually these guarantees have strict conditions attached, therefore expert advice is essential to ensure that you do not miss out.

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