FOOL'S EYE VIEW
The Independent Pensioner

By Jane Mack (TMFJane)
May 22, 2003

Let's face it, there aren't many financial books designed to help you manage your retirement fund once you've given up work. Most of the up-to-date books available are written for the younger market and relate mainly to saving for your retirement and how pensions work, rather than what to do with your pot of money once you get there.

However, I've just finished reading a new book for the retired and soon-to-be retired called The Independent Pensioner: Financial Strategies for an Affluent Retirement. It's written by Anthony Vice, a former director at Rothschilds, and publication was held back until after the April 2003 budget so it's bang up to date.

I'm not a great fan of financial books, although I force myself to read them occasionally. It's such a dry subject and it can be very difficult to explain things without using too much financial jargon. Writers also often make the mistake of assuming the reader has a fair bit of knowledge, which is not always the case.

Although The Independent Pensioner assumes a little bit of knowledge, we're not expected to know too much and it's a fairly easy read. I learnt quite a bit too.

For example, I'm probably showing my ignorance here, but I'd never heard of the Open Annuity. It's not something I've encountered, probably because it's a fairly new invention and because it's only really suitable for retirees who have a pension pot of at least £250,000 and are prepared to take a certain amount of risk. As the average retirement pot is only about £40,000 in the UK, it's not surprising the Open Annuity is not often written about.

The key feature of the Open Annuity is that you can leave the unused portion of it to your heirs even if you are over 75. One of the main complaints about standard annuities is that you have to buy one by the age of 75, they offer limited flexibility and are of no benefit to your heirs unless you've opted for a guaranteed payment period and/or a spouse's pension. Your pension pot will certainly buy you an income for life, but you have no control over how that income is produced. Rates are not that attractive at the moment and if you die sooner than expected, it's the insurance company who lucks out.

The Open Annuity is very complex, but it works something like this:

Usually when you buy an ordinary annuity, your retirement pot gets pooled with everybody else's. The insurer invests the money in various ways, usually in 'safer' investments such as gilts, and uses some of the profits to pay its pensioners.

The Open Annuity puts your retirement pot into its own individual fund, separate from everyone else's, and you have a say in where it's invested and, within limits, how much you draw from it. In this respect, it's fairly similar to the income drawdown method.

However, when you start your Open Annuity, you also buy a special preference share in the insurance company operating it. When you die, the assets within your individual fund are declared as a profit for the insurance company and, as your beneficiaries are now the owner of your preference share, they can sell or redeem its value, thus enabling your residual funds to pass to your heirs.

Strangely enough, these individual annuities are not actually permitted under UK law but you are allowed to buy one from an insurance company operating within the EU. For example, the London & Colonial insurance firm is a popular source because it operates from Gibraltar but complies with similar rules to companies operating in the UK.

As you might imagine, an Open Annuity is not suitable for people who want the certainty of a guaranteed income for life and you must go to a specialist Financial Adviser if you're even contemplating it. And as ever, watch out for the charges. An Open Annuity is a fairly expensive option, but if you have other sources of income in retirement and are prepared to take some risks with your pension pot, it's one you may want to consider.

As for the book The Independent Pensioner, it's well worth a read if you are nearing retirement or have already retired and haven't yet bought an annuity.

More:   Pension Centre | Open Annuities | Sharing Pensions