How to make sure your pension won't go to pot

A combination of increased longevity, record low interest rates and poor returns on government bonds means that it is harder than ever to make your pension pot spread across your retirement.

Nevertheless, as many as one in five people could be throwing away thousands which could make the final years of their lives more comfortable, simply by not taking the best advice on what to do with their pensions.

Research from Prudential shows around 19 per cent of soon-to-be-pensioners shun independent financial advisers (IFAs) and prefer the counsel of friends and family or their own internet research.

Vince Smith-Hughes, head of retirement income at Prudential, says: "There's no doubt that there is a wealth of useful information out there for people planning their retirement. But if people rely solely on this information to make a financial decision, it could lead to serious misdiagnosis, and people could end up making irreversible decisions that leave them financially disadvantaged."

The main problem for many pensioners is how best to invest their saved pension cash. Should it all be put into an annuity that will provide an income for their retirement years? Or should some of the pension pot be put into further investments to cover what, for one in four of us, will include the additional costs of a care home in old age. And then there's the question of planning in order to reduce inheritance tax.

Despite these factors, many people opt simply to take whatever annuity the pension provider offers, rather than exercising their right to search for the best deal under what's called the open market option. This, says Vicky Smith, of the charity Age UK, can cause problems down the line. "People are often not aware of the difference shopping around for your annuity can make, so they may choose what seems to be the easiest option. However, going with a different annuity provider other than your pension provider can increase your income by 20 per cent or sometimes more, particularly if you have a condition that may shorten your life and which ought to qualify you for a higher annuity rate."

Yet despite the threat of losing so much money and the fact that rule changes proposed by the coalition Government will end the compulsory purchase of an annuity by the age of 75, many people still refuse to approach an experienced expert. The option they can access could not only provide a bigger income, but will be more of a fit with the pensioner's needs, according to Martin Bamford, managing director of the IFA Informed Choice.

"Even an extra £1,000 a year adds up to a considerable amount of money over 20 years or more of retirement," he says. "Price comparison and best-buy tables are great for the basic annuity figures, but they ignore the suitability for each individual."

Mr Bamford recognises that his profession's reputation is one reason many people shy away from seeking its help. "There is still a massive misunderstanding as to what we do. Historically, and in some instances still, IFAs have been involved in mis-selling for the commissions. But many more have moved into the 21st century and have better qualifications. If people are unsure, ask around friends and family for a personal recommendation. That's always the best way to find an IFA."

The fear of being mis-sold by an adviser eager to pocket a huge commission from the policy provider should recede in future as, from 2012, the practice is being banned altogether. New rules introduced earlier this year by the Financial Services Authority (FSA) following the Retail Distribution Review will ban product providers paying a commission to independent advisers. And the advisers will have to spell out the cost of their advice and not bury fees in reduced investment returns or higher premiums.

According to Which?, one-off advice fees can range from £100 up to £500, depending on such factors as location, size of the consultancy, an individual IFA's qualifications and expertise, and the size of the investment. For ongoing advice work, typical hourly rates range between £100 and £150 per hour, although most IFAs offer a free initial consultation.

Yet many in the sector also fear that the idea of paying a fee for such advice puts people off as much as the concern that they are being sold something unsuitable because of the commission the adviser may be earning.

This, says Mr Smith-Hughes, is a suspicion that the industry has to overcome. "I firmly believe there's no substitute for expert professional financial advice. Like many services that require skill and a detailed knowledge of the market, financial advice does cost money."

One initiative that could help the public overcome their mistrust is the Money Guidance service, which Alistair Darling announced last year, and which the coalition this week confirmed it would continue to support.

A pilot of the programme, set up last year, is running in the North-west and North-east of England. Another 37 centres in the most financially vulnerable areas of the UK are being established this summer. The service does not give people specific advice, but it offers free guidance as to where detailed help can be obtained, including pointing people towards IFAs.

"The free service is a place people can get impartial and personal advice which gives them the confidence to find an IFA and ask the right questions of them," says Kate Humphris from the Consumer Financial Education Body (CFEB), which coordinates the scheme.

The service guide, who could be from a partner agency such as the Citizens Advice Bureau or the Consumer Credit Counselling Service, would go through what generic options were available. They would then point the client to where specific, individual help and advice could be obtained and what to expect, be it from a bank or an independent adviser. "This allows people to approach the professional of their choice and have an informed conversation about their needs. It's about giving people back the control of their finances," says Ms Humphris. The CFEB also runs a website: www.moneymadeclear.org.uk.

Expert View

Martin Bamford, Informed Choice

"There is still a massive misunderstanding as to what we do. There's a hangover from the days as being seen as nothing but financial salesmen," he says. "We're not seen in this way in Australia nor the US, where IFAs are treated much more as partners to be trusted, in the same way as accountants or solicitors," he says. "We still have a lot of work to do to reach that level of public perception. We are heading in the right direction and the momentum is with us to put things right."