United Kingdom

Why does my pension firm want to know if I am buying an annuity?

I have received a letter from my pension firm regarding my lifestyle fund, asking me to check my plan and to consider whether I still intend to buy an annuity.

I am due to claim my state pension in November 2024 and have never stated I intend to take an annuity.

My fund is only valued at around £53,000 and I have already decided that I intend to withdraw my pension, whether wholly or partially, at some time after 2024.

Retirement plans: Why does my pension firm want to know if I am buying an annuity? (Stock image)

By declaring that I do not intend to take an annuity, will this adversely affect the value of my plan or does the value remain the same regardless?

I was made redundant three years ago and therefore do not make any contributions to the plan but it has been growing steadily despite this, obviously with fluctuations here and there.

I therefore am quite happy to leave well alone but on receipt of this letter I am now wondering if declaring I do not intend to take an annuity will affect the value.

When I have tried to speak to my pension firm in the past they just tell me to obtain independent financial advice which I don't want to do at this time as I feel this is a reasonably simple question.

SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION 

Steve Webb replies: The eventual size of your pension pot will depend on how it is invested.

But the right investment mix for you today will depend on two main things – when you plan to access the money and what you plan to do with it.

I expect your firm is asking you about your intentions because this could affect how it invests your money, so how you answer this question will have an impact on your pension.

Since the introduction of ‘pension freedoms’ in 2015, you have a range of options about what to do with your ‘pot of money’ pension.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

As long as you are aged 55 or over you can take the whole lot out in one go, you can use it to buy an income for life (an annuity), you can take a tax-free lump sum and leave the rest invested in a drawdown account and so on.

The full range of options is explained on the PensionWise site and it is worth speaking to this government-backed service, which offers free individual guidance sessions to over-50s, before making any decisions.

However, your pension company has to make decisions on your behalf about how to invest your pot in the meantime.

In the past, most pension pots were used to buy an annuity. In preparation for this, pension providers used to gradually move your investments into low risk assets in the run-up to retirement – a process known as ‘lifestyling’.

You will notice that the word ‘lifestyle’ appears in the name of your pension product.

The idea was that people who are going to be drawing a regular fixed income want some certainty about how much they are going to get and don’t want to risk a big slump in the stock market the year before they retire upsetting their retirement plans.

If your pension firm is expecting you to buy an annuity they may well already have started to move you into lower risk investments.

However, if you don’t plan to buy an annuity and plan to go on investing some of your money post-retirement (albeit outside your current pension plan) then it could leave more of your money in ‘growth assets’ such as stocks and shares.

Although there will be a higher risk associated with this, you should get a better return over the medium term.

STEVE WEBB ANSWERS YOUR PENSION QUESTIONS

       

And if you are planning to go on taking some level of investment risk into retirement, it would be a bit odd for your current pension provider to start de-risking pre-retirement.

For anyone with a private pension, it is worth checking that their pension provider has up-to-date information about their intentions.

Some pensions will be going through a process of ‘lifestyling’ – possibly without you even realising it - even though only a minority of people now buy an annuity.

If you do not plan to buy an annuity, you need to make sure your pension provider knows this.

The other thing to keep updated is your intended retirement age – or, to be more precise, the age at which you plan to draw on your pension.

Sometimes, people can specify an expected retirement age when they take out a pension – possibly in their 30s or 40s – and their plans change considerably in the following decades.

But the pension company still thinks your original answer is your intended retirement age and they invest your money in anticipation of you drawing it at that age.

There is a possibility that they may start to ‘de-risk’ your investments too early if they have a premature retirement age on their systems.

All of this points to the importance of ‘getting to know your pensions’.

Make sure that for each pot you know what your pension company is doing with your money and what assumptions they are making about your plans.

If they are acting on incorrect information you may not get the investment mix that is right for you.

Ask Steve Webb a pension question

Former Pensions Minister Steve Webb is This Is Money's Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at [email protected]

Steve will do his best to reply to your message in a forthcoming column, but he won't be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message - this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve's several earlier columns about state pension forecasts and contracting out, which might be helpful.  

Football news:

PSG wants to buy Varane. He would prefer to move to Manchester United, if it is not possible to extend the contract with Real Madrid
New details of the failure of the Super League: Laporta blabbed to Tebas, Ceferin talked to Agnelli on the way to Switzerland, City and Chelsea are not involved
Paulo Dybala: Ronaldo always wants to win, he's obsessed. If he loses in training, he becomes taciturn
JP Morgan Bank on Super League: We have misjudged how this deal will be perceived by the football community. Learn a lesson
In the summer, Bayern will have a new coach: Flick is tired of butting heads with Salihamidzic, and he goes to the national team. They want Nagelsmann in his place
Ronaldo is considering a return to Manchester United. Cristiano is ready to take a pay cut (GdS)
Arteta that Arsenal should not have been called to the Super League: We are one of the best clubs in the world. There is no denying the story