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Cash in your Annuity Newsletter 2

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Cash in my Annuity Newsletter 2
18 May 2015

Will you end up paying the price for ignoring the lessons of Australia’s experience of pension freedoms ?

The changes made to the UK pension rules introduced by Chancellor George Osborne have become more commonly known as “pension freedoms”. While it may seem like we are living in a new and exciting world, actually this has all been done before.

Approximately 20 years ago, Australia introduced rules that are very similar to those recently introduced in the UK. In particular the key features of the Australian system were the ability for people to use their pension fund how they wanted, without limiting the income they took or compelling them to buy an annuity. As there are undoubtedly many common traits and similarities between us Brits and our Aussie cousins we can only assume that the UK Government took note of Australia’s two decade experiment with pension freedoms.

So if we do follow the same route as Australia, what can we look forward to ? The somewhat depressing answer is a return of compulsory annuity purchase – in other words right back to where we started !!!

Many commentators now believe that an Australian pension commission is soon to re-introduce the requirement for people to use their pension fund to purchase an annuity – a guaranteed income for life. One of the main reasons for this reversal is the increasing number of Australian senior citizens needing to turn to the State for the provision of benefits and assistance.

With the statistics from the Australian system becoming available, it appears that 25% blew their pension pots by age 70. This has led to the saying that if you take a taxi in Sydney, the driver is likely to be over 70 as pensioners spend their cash too quickly, forcing them back to work. *

It is currently hard to see a significant difference in either the approach taken by the UK Government, or in the behaviour of UK pensioners, that indicates a different outcome awaits us. Bearing this in mind, it means that the idea of taking large amounts of income out of a pension plan has proven to be a very bad idea.

From April 2016 the UK Government is also planning to let people who already have an annuity, exchange their regular income for a one off cash lump sum. From the numbers who have already signed up to our information service relating to cashing in annuities, it looks like the take-up will be significant, and a large number of UK pensioners may have nothing else to live on, other than the state old age pension.

We believe that a future UK Government will need to take action to prevent the UK tax payer from picking up a huge welfare bill relating to those aged 65 and over, who decided that a new car and a trip to Las Vegas was better use of their pension fund than using it to provide for food, heating and clothing for the next 20 or so years. Given that previous Governments have made changes to the pension rules every 5 – 6 years, we can perhaps expect some further legislation in 2021.

It is also very hard to see how financial advice is really going to play a key role in preventing an Australian outcome. The apparent guidance offered by Pension Wise (the Government’s free guidance service) seems to consist of nothing more than three words  “take financial advice”. However given the risk of future compensation claims that could await any adviser, the advice is likely to be ‘don’t do it’. This then leaves the customer being required to pay for advice that they are likely to ignore. In effect all that can be done is to try to make the customer aware of the potential consequences of their actions by issuing risk warnings and disclaimers.

The Regulator, The Financial Conduct Authority (FCA) is naturally concerned about the long term protection of customers and trying to prevent them from making decisions that will have negative financial outcomes for them. Without consulting, they have already introduced rules that prevent people in Final Salary schemes with a transfer value of more than £30,000 from transferring away from that pension, unless they have paid a pension transfer specialist thousands of pounds for advice on the proposed transfer. At the same time they have made pension transfer specialists aware that only in a very small minority of cases do they believe that it would be good advice to recommend the transfer.

While the FCA’s actions are understandable and in the customers’ best interests, we do now have the bizarre contradiction where somebody in a Final Salary scheme worth £40,000 will be (or will  feel) compelled to stick with it, while another customer with a private pension of £200,000 can cash it all in and follow former Pension Minister Steve Webb’s line and blow it all on a Lamborghini.

Just because the world is going mad, doesn’t mean that you have to !!! The ‘bird in the hand’ isn’t always the right approach.

When you first started your pension it is likely you did so because you realised that you wanted a better lifestyle than would be offered to you via the State Old Age Pension. In the light of this, you should carefully consider why a different approach is required.

There is no compulsion on you to take all of your pension fund in just a few years or to give up a regular income for life in exchange for a single lump sum. Think carefully before you make an irreversible decision. While we make money from providing customers with the retirement products they want, we want all of our customers to have a financially secure retirement and not regret taking a decision in the excitement following the early days of pension freedom.

If you are like many Australians, once you are 70, the car you bought with your pension pot 10 years earlier may now have to double up as a taxi!!  

*Source : Haven Risk Management – who pinched it from The Sunday Times !!

If you have a final salary pension our final salary pension transfer calaculator will give you an instant quote including full costs and charges.


Important : Your annuity is designed to provide you with a guaranteed income in retirement. This income will continue to be paid for as long as you live. If you sell your annuity you may not have a sufficient level of income to sustain your lifestyle in retirement. It is likely to be the case that the value of the lump sum you receive will be less than you would have received if you had kept your annuity and died in line with your life expectancy at the time you took out your annuity.
 
 
 
Freedom for people with an annuity
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"Well we’ve already given freedom to people saving for a pension. What we’re going to do today is give freedom to the 5 million pensioners who have an annuity. Now for many of them, that will be the right thing to have. But some will want access to that money, so we’re going to change the law. It’s all part of trusting people who’ve worked hard and saved hard all their lives. It’s all part of having a long-term economic plan where we build our country on savings and investment."
George Osborne - 15th March 2015

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Please Note : The government are currently considering plans to allow individuals to sell their annuity for a cash lump sum. We cannot guarantee that these changes will take place nor that you will be able to take advantage of this legislation if it becomes law. These proposals do not apply to the State Old Age Pension.
 
We are an internet retirement business. We help people with all kinds of retirement issues, We take great pride in what our customers say about us.
 
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”Considerate, conscientious and confidence-inspiring”

From the start Bob and his team let us know that they understood our nervousness about deciding what to do with our pension fund.  We were never put under any pressure to make a decision; on the contrary,  the team were considerate of our need to take our time to think about what we were doing and be satisfied that we were doing the right thing.  It didn’t seem to matter how many questions we threw at them – they always replied promptly and in as much detail as necessary and they were always ready to help further.

Indeed, we were very impressed by just how conscientious they are.   We received emails and paperwork accompanying every step we took and it would be no exaggeration to say that no efforts were spared to make sure that everything was documented down to the last detail.

Bob and his team inspire confidence and do so in a way that is friendly and familiar.  We’re confident that we’ve found someone who understands what’s going on in the pension industry and is able to help us make our own decisions about how best to invest our fund.   And we’re happy that this person is someone who’s always very approachable  and ready  to do what he can to help his clients. 

 
 
Mr V. S. - Prague
 
 
January 2015
 
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Please Note : Some of the ideas and concepts discussed on this website are not yet law and may not become law. There is still the possibility that some or all of these changes could be altered or cancelled as the changes announced by the Chancellor of the Exchequer have to be passed by Parliament. We cannot be held liable for any action taken by a customer in anticipation of the proposed legislation becoming law.
 
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