Certain pension providers can offer you a range of guaranteed products in a part investment/part insurance retirement portfolio. They allow you to choose from a number of risk-rated investments that include income or capital guarantees and protected growth funds. While for many people these options will seem very attractive, certainly when contrasted with the limitations of standard annuities, you should consider the benefits they can have to your own circumstances before deciding to invest in one. A review of the key advantages and disadvantages of pension guarantees might help make your decision.
Firstly, the design of the guarantee is that it should allow you to get at least as much out of your pension as you put into it. The guarantee is a safeguard against common retirement concerns, like running out of money or losing money to poor investment performance. Perhaps the most enticing reason to invest in a guarantee is that it allows you the opportunity to benefit from potential market growth in a way that traditional annuities don’t, while still protecting your existing pension. The amount you invest is entirely up to you and you can guarantee all of your investment or just part of it. There is also a choice of options to look at – you can choose the one that best suits your needs, whether it be a capital guarantee or an income guarantee.
The biggest drawback of a guarantee is that it will cost a not inconsiderable chunk of your pension pot. The exact cost depends on where you decide to invest your money and what fund/s you invest in or, in the case of a capital guarantee, the term you opt for. A financial advisor will be able to inform you of the cost before you set up the pension. Also, you should be aware that guaranteed annuity rates may be lower than standard annuity rates on comparative pension funds.
There are a couple of other things to be wary of. Firstly, cashing-in your guarantee, whether capital or income, will most likely mean your guarantees no longer apply and if your provider does not offer a guaranteed fund value you may get back less than your original premium. Guarantees depend on the issuing insurance provider being able to pay them and if all of a sudden such a company were to no longer exist, it would likely affect their ability to honour the guarantee.
Please visit the Understand Your Pension website to find out more about your pension options or to request a callback.
Robert Van Der Does is freelance financial journalist.