Boring but important

It’s tough to make any article on pensions interesting, but I’m going to try by relating a cautionary tale.

A  friend of mine, who just reached 60, was minded to take his pension which was guaranteed by the provider at 10% of the fund. This seemed too good to be true and like most things that are, it was. The 10% figure was not based on now, but 10 years time. The real figure – a third of this – was hidden away. Even his pension advisor fell for it, initially advising him to take the guaranteed pension, which was three times annuity rates. He happened to speak to his accountant who advised that in almost every case it was more sensible to take 25% of the fund tax free. The scary thing is that, had he taken the guaranteed pension and then received a third of what he anticipated, there is little he can do. The moral of the tale is to take very careful independent advice .

The government has now liberated pensions from constrictions and there is much greater flexibility on how you take the fund. I told my friend to take nothing until it’s clearer how this works in practice. Indeed, far from taking his pension, he might do better to fund it more.

I suspect that providers are happy that pensions are so dull, but to lose interest can have fatal consequences.