Nearly a third of small company businessmen expect to downgrade their existing pension schemes when the Government introduces personal accounts in 2012, according to a survey by the Association of Consulting Acturies published last week.

Personal accounts are the government’s remedy for the estimated 10 million individuals who are failing to save for retirement. The Government-sponsored scheme will involve anyone who works for an employer being automatically enrolled into a personal account or into the company pension scheme if this matches, or is superior to, personal accounts.

Personal accounts will involve workers paying 4 per cent of their wages into the scheme, employers 3 per cent and the Government 1 per cent in the form of tax relief, making the total contribution per worker 8 per cent.

Although employees will be automatically enrolled into personal accounts, anyone who doesn’t want to be in the scheme can choose to opt out, but workers will have to make a deliberate decision to remove themselves  from the scheme, rather than not joining it (which is the case at the moment).

About 31 per cent of businesses employing up to 250 staff have said they will either reduce their scheme benefits following the launch of personal accounts or ditch their existing scheme altogether in favour of personal accounts because they will be cheaper.

This would be a disaster for pension provision as, according to the National Association of Pension Funds, the average employer contribution to defined contribution (money purchase)  schemes is currently 6.4 per cent and for defined benefit schemes (final salary), 15 per cent.

But employers fear the cost of maintaining their existing arrangements will soar if most of their employees decide to join. Currently, employers benefit from the fact that 51.5 per cent of  the workers don’t join company pensions schemes for various reasons, such as ineligibility or not wanting to pay the monthly contributions.

To date, workers have only  gone on strike over the reduction or loss of final salary benefits.

It will be interesting to see whether workers will strike over the loss of defined contribution benefits come 2012, if employers carry out their threat to switch to personal accounts.

Check out how much your pension fund will buy you in the form of an annuity:
http://www.defaqto.com/consumer/pensions.aspx

Confused about pensions? Read our guide to company schemes:
http://www.defaqto.com/consumer/pensions/company-pensions.aspx

Want to know more about personal pensions?
http://www.defaqto.com/consumer/pensions/personal-pensions.aspx

For the growing horde of emigrating Brits, the facility to transfer one’s pension abroad  may look attractive, but could be fraught with pitfalls for the unwary.

Since 2004, UK migrants have been able to move their pensions to foreign schemes without the UK scheme incurring an ‘unauthorised payment charge.’

This is only possible if the scheme is on HM Revenue & Customs’ list of qualified Recognised Overseas Pension Schemes (QROPS). (http://www.hmrc.gov.uk/pensionschemes/qrops.pdf)

This is a list of QROPS that have consented to have their details published (not all QROPS will necessarily feature within it) and HMRC says it is not to be taken as a recommendation for a particular scheme or product.

The list is updated twice a month, with new QROPS added or rogue ones removed, as was the case recently when three Singaporean schemes fell foul of HMRC’s rules.

HMRC spokesman Patrick O’Brien says: “QROPS are only for genuine migrants who have gone to live abroad permanently and who have already resided overseas for at least  five years when the transfer takes place.

“We are scrutinising these schemes very carefully to ensure that people are not using them as a tax dodge to get their hands on their entire pension in one go. We found that some schemes in Singapore were breaking the rules so they have been removed from the list. It is up to an individual and their adviser to sort this out as they knew what the rules were when they did this.”

To pass muster with HMRC, the receiving pension scheme must confirm that at least 70 per cent of the fund will be used to provide the planholder with a lifelong income in retirement and that the money cannot be taken out before the member is at least age 50.

The attractions of this are obvious. Some foreign pension schemes enable you to withdraw large of chunks of your pension at one time and for the balance to be passed to family and heirs free of tax when you die.

For anyone still living in the UK or who has only left the UK recently, HMRC will only allow transfers to schemes that run along the same pension rules as in the UK.

Financial advisers have expressed caution about these schemes and are wary about advising on them because of the risk of a scheme’s qualifying status being removed after a transfer has taken place. Transfers can also be expensive, possibly incurring an initial charge of 6 per cent and an annual charge  of 2.5 per cent.

Jason Witcombe, an IFA at Evolve Financial Planning said: “It sounds great, but if I were advising on one, I would do my research very carefully. There could be a problem with people trying to have their cake and eat it. I would probably refer it to someone specialising in this area.”

Try out Defaqto Annuity calculator to see what income your fund will buy:
http://www.defaqto.com/consumer/pensions.aspx

Pensioners who opted to take income drawdown at retirement, rather than purchasing an annuity, could face a sharp drop in their monthly income as a result of recent stockmarket falls.

Income drawdown is the facility to draw a monthly income from your pension fund while it remains invested in the stockmarket and has been favoured by those with large pension funds wishing to retain control over them while in retirement.

But it is a risky strategy and only recommended for those who have assets, other than their pension, to live off.

This is because the income you can take each year under an income drawdown plan is limited by the taxman to between zero and 120 per cent of what a standard annuity would pay you for your age until age 75. 

The amount is re-set every five years when your plan must be reviewed by a specially qualified financial adviser.

Recent stockmarket falls are  prompting many drawdown investors to switch from drawdown to annuities because they have seen the reduced level of income they would be locked into for the next five years following a five yearly review.

Those who are worst hit are those who have been taking the maximum permitted income. For example, if the annuity rate for a 65 year old man is 7.5 per cent, you could take a maximum of 120 per cent of this, or 9 per cent.

Assuming a £100,000 fund, that would give you an annual income of £9,000, but if the fund dropped 20 per cent to £80,000,  your annual income would fall to £7,800 (9 per cent of £80,000).

In addition, if you continued taking the maximum allowed, your fund could become depleted, particularly if the underlying investments continued to perform poorly.

This is why advisers recommend that pensioners don’t take the maximum income allowed, so that they have some leeway in the event of equities falling in value.

 If stockmarkets improve over the next year, you can always ask for a review before your next five yearly one, although your adviser will charge an extra fee for this.

If you can’t stomach further stockmarket volatility or you are approaching age 75 (when income drawdown can’t be taken any more and you have to switch to an Alternatively Secured Pension or buy an annuity), now may be the time to annuitise.

Billy Burrows of The Retirement Partnership says: “The current market conditions show just how risky drawdown can be, particularly for those taking maximum income.  But the good news is that  annuity rates have been increasing since the beginning of this year as a result of rising bond yields.”

Defaqto pensions principal, Matt Ward, says: “Given the well publicised fact that people are living longer, allied to the current volatility of the investment markets, there is a potential danger that the income drawdown pot will not be able to sustain the client’s retirement needs. If the client is not comfortable with the risks involved, their financial adviser may need to consider sacrificing the flexibility of income drawdown with the stability of an annuity, or appraise the suitability of the new breed of unit-linked guaranteed facilities.”

To see how much your pension fund would buy you, visit our Annuity Calculator:

http://www.defaqto.com/consumer/pensions.aspx

It’s all change in the once sleepy world of annuities. And before you yawn with boredom, be aware that you may well have to buy one yourself, whether you like it or not.

This is because three quarters of final salary (defined benefit) schemes are now shut to new employees and more workers belong to group personal pensions or have some form of individual personal pension arrangement, such as a stakeholder or Sipp.

All these types of personal  pension require you to buy an annuity with your pension fund when you come to retire (unless you decide to do income drawdown instead, but that’s another story).

The cost of buying an annuity has soared over the last 15 years, as bond yields have fallen and longevity has increased.

In addition, whereas most insurers used to assess annuitants’ likely life expectancy based on gender, age and marital status, the business of rating how long someone is going to live is now a much more sophisticated.

This is because the difference in lifespans in different parts of the UK is quite stark. People living in Glasgow, for instance, have the shortest likely lifespans for anywhere in the UK, whereas men living in West Dorset have the longest.

Hence, the shift to what is known as ‘postcode annuities’ whereby insurers look at geographical, as well as health and socio-economic, factors when estimating life expectancy.

The idea is that if you live in an area with a history of people dying early, the insurer will pay you a higher annuity income because you are likely to die much sooner than someone living in a ‘long life’ hotspot,  such as Bridport in Dorset.

There are also strong correlations between blue collar workers living in the north of the UK and shorter life expectancy, and wealthy white collar employees in the south and longer life expectancy.

Norwich Union is to follow Legal & General and to start using postcode annuities from September this year. Annuitants will be divided into nine groups based on geographical life expectancy, with those with the shortest life expectancy receiving up to 2 per cent more than those with the longest expected lifespans.

NU admits that this will mean that around 30 per cent of ‘healthy annuitants’ will be worse off.

Defaqto pensions principal Matt Ward says: “This development is yet another sign that annuity rates are moving towards an individual pricing basis. The onus for consumers who view annuities as their preferred method for translating retirement savings into retirement income is to shop around to find the best annuity rate in the market for their individual circumstances, whether this be through their smoker status, health outlook or postcode.”   

Currently only one in three individuals approaching retirement bothers to seek out the best rate in the annuity market by using what is called “the open market option” - or the right to shop around, to you and me.

By doing so, you could obtain up to 16 per cent more than the standard rate if you are a smoker, and up to 30 per cent more if you have a life threatening illness or medical condition.

It is best to use an Independent Finacial Adviser when looking to purchase an annuity as it is a complex business and once you have bought an annuity you can’t change your mind afterwards. 

It really is a ’once-and-for-all’ decision which will affect your income for the rest of your life.

 You can get an idea of how much your pension fund might buy you  by using the Defaqto Annuity Calculator:http://www.defaqto.com/consumer/pensions.aspx

IFAs specialising in the annuity market include:
http://www.williamburrows.com/
http://www.retirement-partnership.co.uk/
http://www.annuitydirect.co.uk/
http://www.annuity-bureau.co.uk/