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Pension drawdown advice please(17 Posts)
Been informed that my company is switching our default pension fund from a Lifestage 'annuity' pension to a drawdown one. We have to decide by Friday whether to move to the drawdown option or stick with the annuity.
I'll be honest and admit I don't understand as much about pensions as I should. I've been doing some reading up and I really don't know what's best. DP isn't sure either.
I have no idea when I retire whether I'd rather have a fixed 'income' or whether I'd be better off just withdrawing funds when I need them.
Any advice from those who understand pension plans better than I do??
Just switch to the drawdown. You'll still be able to purchase an annuity at retirement. Things do depend on people's personal circumstances and preferences but I think a lot of people will choose to purchase an annuity with a part of their pot (longevity insurance type of thing). They will keep the rest in the drawdown pot to use as needed and manage it better for tax and inheritance purposes.
How long have you been a member of the existing scheme? What rights will you be giving up? Is the scheme in funding difficulties? Is it being wound up completely or will there still be deferred members?
You really need professional advice on this - taking into account the detail of your current offer, the detail of the new proposal, your family structure and income and your life expectancy.
As a general rule, new schemes are unlikely to be more generous than existing ones.
Thanks for your replies.
Lohengrin that's what I was worried about, I know that pension plans seem to be getting less and less generous, so my inkling was that the 'new' one probably won't be as good as the existing one, especially as the company is going to set it as our default plan.
Sunseed I will get in touch with my company's HR department to see if I can find out some more info. As far as I know there are no issues with the current fund, but I really don't feel like I know as much as I'd like to and the information packs we've been given are written in a language I don't understand, if I'm being totally honest I definitely don't have a business/financial brain.
And thanks for your reply JoJo. That's interesting if I would be able to buy an annuity at a later date. I suppose that would give me the best of both worlds, I'll have to check that will definitely be an option.
I do agree that new plans are less likely to be generous than old.
But in this case, annuities are becoming quite "old fashioned" and drawdown more common, so it could be more about keeping with the times.
Is the only thing changing the way you access the pension at the end? Are the contribution rates the same as before?
Are you in a union? Or are other people in your workplace? They can often be very good sources of plain English explanations.
I would leave it where it is.. am no expert but I think that the rules have changed so you dont have to buy an annuity anyway.. .
and yes older schemes are usually more generous..
( however I am no expert I have a public sector pension which has different rules to many private ones.)
Why aren't your company offering you access to professional advice? That's wrong. This is a complex decision where other factors need to be considered.
I'll bet the current annuity arrangement has guarantees attached to it hence the drawdown option to move people away. You need to find all this out OP.
You do need to find out more but I wouldn't necessarily assume that the company want to leave their employees out of pocket. It could be that they don't want to pre-determine how people use their pots and give them the flexibility. And yes, you can buy an annuity - you shop around for it too - just like for a loan or savings account ;)
Thanks for all the useful advice! I'm going to try to speak to one of our union reps today to get some more info. I'm leaning towards moving to the new system, but I'm going to find out more first.
That's great news that you're unionised! Definitely lean on them for information.
Also, don't be afraid to ask your Pension department to explain more clearly. They can't legally advise you, but if their own pack isn't easy for you to understand - ask. I work for a big firm, our pension was changed for the worse - nobody lied to pretend that wasn't the case. I wouldn't rely on them as your only source of info of course - but for plain English explanations of parts of their communication, do ask!
But are you getting changed from an annuity? Or it is a final salary or a career average scheme? If either of the latter two then changing would most likely be a bad decision.
Oh no, my current pension isn't the greatest either. I've only been part of the current scheme for 2 years (I'm 25) so I'm unlucky in that all the decent schemes seem to have died a death now. A few of my seniors are on final salary schemes, but mine is just a standard annuity one. I can pay in up to 6% and the company will match it.
Reading the OP, it sounds like a simple change to the default investment option under a workplace DC scheme. Think a lot of posters are seeing this as being far more sinister than it really is!
You must seek regulated advice but it sounds like they're proposing to remove the lifestyling option under the plan, where your fund automatically is switched into lower risk investments on a gradual basis as you reach the nominated retirement age.
This is very common in workplace DC schemes at the moment - I've seen several make such changes.
Lifestyling worked fine for those who wanted to buy an annuity at retirement age & wanted to know that their funds wouldn't drop significantly in value just prior to the annuity purchase. In most cases, you'd be mostly in cash & fixed interest by the time you get to retirement age, with very little (if any) equity content.
However, in light of the new pension freedoms that came into effect in 2015, fewer people are buying annuities on reaching their retirement date. Lots are going for the drawdown option where their fund remains invested and they draw an income directly from their pot. The downside is that this drawdown income isn't guaranteed and so the fund needs to continue to grow in order to attempt to keep the income even vaguely sustainable. This is why those who want to follow the drawdown route usually WON'T want the lifestyling option - bonds & cash alone just won't provide sufficient growth to sustain any level of income.
With lifestyling you also have no control over when the switches take place - the timing may work to your advantage but equally it may not. Lots of people prefer to know exactly how their fund is invested at any one time.
If you switch from lifestyling to 'freestyle' funds, you might find that the fund charges increase due to the types of underlying investments held and the management styles. Increased charges aren't always a bad thing though if you're getting better funds (and therefore better returns) as a result! Passive index tracker funds are a low cost way of getting some equity exposure but again, speak to your own IFA about this.
Thank you all for the really helpful replies. It's all a foreign language to me but I feel like I have a slightly better understanding of it all now!
After a lot of thought I decided to switch to the new fund.
Taking into account what I know now (although I know that things can change), at retirement age I'm hoping that I won't need to rely on a fixed annual income. This is due to inheritance etc that I know I will receive (grandparents' only grandchild, parents' only child etc). I will also be left some property much later on in my life and me and DP already own 2 houses, so I'm hoping that the drawdown option will probably be best for me anyway as I'm hopeful that I won't be heavily reliant on my pension.
Sounds like to have it pretty well sorted. Considering the extra info you've just given you've made the right choice.
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