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Pints of view

As I strolled into the pub, I thought to myself – at last a couple of hours of peace and quiet. No Green Paper, no pension simplification, no consultation papers and most of all no pensions.

Carefully carrying my first pint of Old Stokestrangler and the most recent copy of Hello magazine, I found myself a comfortable seat next to the fireplace. Barely had I started reading when my attention was strangely drawn by a conversation going on between three older gentlemen no more than a couple of yards away.

“When I retired six or seven years ago at 60, I was advised to buy an annuity. This meant converting my hard earned pension fund into an income. I was a bit concerned at the time as the amount of income I could get did not seem very high compared with my fund. I was given a number of options and in the end I chose an income that increased by 3 per cent per annum and also provides an income of 50 per cent to my wife on my death.

“Where do I stand now? Well, I don&#39t think that I&#39ve chosen too badly. From what I understand, annuity rates have got steadily worse and I wouldn&#39t get the same amount today. Inflation has been low so I think I&#39ve kept pace.

“There are a couple of things, however, since I retired I&#39m now divorced, she said something about me spending too long at home, and I&#39ve also received a tidy little inheritance from my great aunt – she said it was a reward for not visiting her. So I&#39ve spent part of my pension fund on a benefit that I&#39m unlikely to need and it would really have been quite good to have some degree of investment flexibility now that I&#39ve got the extra money. I feel secure but I just feel that a bit more flexibility would have been useful.”

The second gentleman then joined the conversation.

“I&#39m very much of a similar age but my situation is somewhat different. I retired at 60 but did not buy an annuity. At the time, my financial adviser recommended a new product – income drawdown. This was more flexible than an annuity, I could take an income from my pension fund between prescribed limits yet leave the rest invested.

“There was also the added advantage of maintaining control over any capital such that I can pass on any residue to my family on death. I&#39ve got some other assets, enough to give me a small supplement to my pension income but not a fantastic amount.

“It started off well – in the first few years, the investments performed well and, even though I was taking income out, my fund increased in value so that when after three years we did a review, I could have bought a higher annuity than at the outset. On reflection, perhaps this is what I should have done.

“Over the last few years, things have not looked so rosy. Markets have fallen. I was still invested and my fund has fallen drastically. I&#39ve recently had another review and the bad news is that the maximum income that I can take has also fallen and is now somewhat less than the original annuity. I&#39m now in a bit of a quandary. What do I do? I&#39ve not got sufficient other assets to make up the difference. Do I cut my losses and buy an annuity or will this just crystallise my losses?

I can just about cope now but I really cannot afford to lose any more. It&#39s quite ironic really, I&#39ve got control over my capital and can pass it on on death, I&#39ve got choice over my benefit to provide for my wife but I&#39ve barely got enough money to live on.”

Obviously, the third man had a story as well and he immediately followed on.

“Funny isn&#39t it – my situation is very similar. I also took out an income-drawdown plan. In the early years, I took out very little and supplemented it with some part-time work. As you say, investment markets prospered and at my first review I was sitting on some substantial investment gains.

My financial adviser then suggested to me that I crystallise some of these gains – either buy an annuity with part of the fund or move some of the profits into a low-risk investment. I did buy an annuity with part of the fund as the Sunday newspapers all seemed to suggest that annuity rates could only get worse, and they have. I have also moved some of the profits made into a low-risk fund and, in hindsight, this was one of the best decisions that I made. As you say, markets have not been good and if I had not done this. my income would have fallen.

“I know that if I die my fund would go to my wife less a tax charge of 35 per cent. My adviser is suggesting, however, that I put the money into a trust on my death as this could be useful for the family – helps mitigate inheritance tax or something like that.

“I know that at the moment I will have to buy an annuity at 75 at the latest. I&#39m not so happy about this as it seems a bit of a con to me but I&#39m told this is the law. What I must do, however, is to gradually move any investments that I have in equities into more secure investments in preparation for this annuity purchase. I think I have made some good decisions and made the best of what I have had.”

By this time, I must admit I had sneaked in a couple of extra pints and I jotted down a few notes.

•There is a fine balance to be achieved between flexibility and security.

•Investment risk is a vital consideration.

•Circumstances change.

•A little bit of knowledge can be a dangerous thing.

•A little bit of professional financial advice can be a godsend.

•Must drink at a different pub.


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