An imposed workplace scheme is not the only option for retirement, as more low-cost Sipps come on to the market.
The financial pages have been full of advice on pensions with the launch of auto-enrollment last week. It has thrown a desperately needed spotlight on how and why we should be saving for later life.
But not everyone is happy that the state is stepping in. If you want to take control for your own retirement saving, a self-invested personal pension or Sipp, could prove a compelling alternative.
Sipps are essentially do-it-yourself pensions, offer more flexibility and a wider range of investment choices than most personal pensions. As well as cash, government bonds and funds, you can choose to invest your money in more complicated investments such as individual shares, open-ended investment companies (Oeics), commercial property and commodities.
They still benefit from all the features of a more traditional pension, including up to 50 per cent tax relief on pension contributions, but instead of trusting the provider to pick funds, you decide how to invest your contributions typically with a much wider range of funds to choose from and the opportunity to invest in direct equities by buying and selling shares.
It's true that when they first emerged, Sipps were targeted at experienced investors with substantial pension pots, but as costs have come down they have proven to be an increasingly popular choice among the general population.
"The Sipp market has been revolutionised in recent years with the emergence of low-cost plans, which have made them accessible to the mass market. Sipps are now becoming ISA-like in their appeal," says Jason Hollands of independent financial adviser (IFA) Bestinvest.
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MILLIONS of new pensioners were warned this week that they face a retirement of poverty after weeks of slashed annual payouts.
Pension companies have cut rates offered on their guaranteed annuity incomes 24 times since the start of summer.
Standard Life is the latest to do so, lopping five per cent off the rate offered to the newly-retired and those approaching retirement.
And male pensioners will suffer an extra blow later this year with the introduction of the EU’s new “gender directive” which will further force down annuities for men.
Craig Palfrey, founding partner of independent financial advisers Penguin Wealth, said: “Annuities are in meltdown. We’re way beyond red alert. They have been coming down relentlessly and Standard Life’s decision to take a sword to rates is just the latest example.
Twenty years ago a £100,000 pension fund would have guaranteed an income of £15,640 a year for life for a 65-year-old man. Now it is just £5,140 a year.
And the crisis decimating pensions is set to continue for months, perhaps even years, piling on the agony for the newly-retired.
Experts warn that the situation is likely to worsen as annuity providers struggle with volatility in the stock market and the Bank of England’s quantitative easing (QE) strategy to tackle the recession.
The money-printing policy has been attacked for triggering “a death spiral” in pensions, which some experts say has led to the worst retirement payouts in history.
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Millions will see pensions slashed by up to 20% as new EU rules are set to send annuities plummeting
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Millions of people could see the value of their pensions slashed by up to 20 per cent because of new EU rules.
Those with a £100,000 pension fund could be more than £1,100 per year worse off in retirement because of the reforms, research has shown.
The Solvency II rules, which are due to come into effect in January 2014, will force pension funds to hold a higher proportion of 'safe' Government bonds.
As the bonds - called gilts - have such low rates of return it will drive down the returns on retirement fund annuities, which are used to pension income.
The reforms are designed to make pension funds safer and reduce the risk of them going bust.
Annuities, which set retirement income for life, have already fallen to historic lows because of the impact of quantitative easing.
At present, a pension annuity fund may invest 20 per cent in low-yield gilts and the rest in riskier corporate bonds which have a higher rate of return.
But under the new EU rules, annuity funds will be forced to hold a higher percentage of gilts.
New research by Deloitte suggests annuity rates will plunge by between five and 20 per cent when the directive comes into force in January 2014.
A £100,000 pension pot currently gives an income of £5,837, but once the regulations come into effect they will be between £292 and £1,167 a year worse off.
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Savers approaching retirement are being advised to put off buying a lifetime annuity – or even to consider deferring retirement – as the euro crisis further reduces the income offered to UK pensioners.
Pension experts issued the advice after the FTSE 100 index suffered its largest one-day fall since November, as investors fled equities on fears of a Greek exit from the single currency – and bought into “haven” assets, such as government
This shift is significant for those planning their retirement as both the annuity income they can buy with their pension funds, and the income they can draw directly from their funds are determined by the yields on government bonds, or gilts. Heavy buying has pushed gilt prices up, reducing yields to record lows.
“It’s such an awful and difficult situation for anyone approaching retirement,” said Dr Ros Altmann, director-general of the Saga Group, the financial services group for over-50s. “If you can delay, it is worth considering because at some point there should be a correction in rates.”
Joanne Segars, chief executive of the National Association of Pension Funds, said: “People who are nearing their retirement need to think carefully about whether this is the right time to lock into the current low rates of interest.”
Advisers suggested taking pension cash in stages. “It’s possible to phase into retirement by taking tax-free cash only,” said Mike Morrison, head of pensions development with Axa Wealth. “In the short term, it may be possible to take income from elsewhere.”
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People about to retire this year expect their pensions to be lower than those who have retired in any of the previous four years.
A survey by the Prudential insurance company found that expected annual retirement income has dropped by £3,100 since 2008, to £15,500. That includes income from state, company and private pensions.
A fifth of retirees expect to live on less than £10,000 a year, with the highest incomes being those in London.
Vince Smith-Hughes of the Prudential said: "The impact of the credit crunch,banking crisis, recession, and concerns over the eurozone, has been reflected in the fact that expected retirement income levels have hit a five-year-low."
A key factor has been the continued fall in the value of the annual pension that can be bought by a lump sum saved in a private pension fund. Annuity rates, as they are known, dropped by 8% in 2011.
That was their fourth consecutive annual fall, according to the financial information service Moneyfacts.
It was due to continued increases in longevity, and further reductions in the return, or yield, available from buying the government and company bonds needed to provide a guaranteed income in retirement.
Richard Eagling of Moneyfacts, said: "Unfortunately, by increasing the demand for fixed income instruments such as UK government bonds, the ongoing eurozone crisis and the Bank of England's quantitative easing programme have driven gilt and corporate bond yields down over the last twelve months, both of which underpin annuities."
Billy Burrows, a leading annuity broker, said: "At the beginning of 2011 the yield on 15-year UK gilts was 4.02% but by the end of the year the yield had fallen to 2.46%."
"Over the same period, our benchmark annuity fell from £5,834 per annum to
£5,362," he explained.
The Prudential survey included 1,003 people who were due to retire this year.
Full article - http://www.bbc.co.uk/news/business-16491365
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