Question
Upon retirement rather than buy an annuity I was thinking of placing the crystalized funds on fixed deposit for a period of 5 years. At the moment some good institutions are paying in excess of 4 1/2% for 5 year funds. However, I understand that monies from a pension fund are classified as Trustee Monies and are subjuect to certain conditions and restrictions which could mean that a funds placed on deposit might only earn an interest rate of 2%. Is this correct?Answer
As you've discovered, money must remain in a pension until you take benefits, i.e. purchase an annuity (income for life) or draw an income. This means you have to use the cash account or fund(s) offered by your pension provider and herein lies the problems - the rates are usually rubbish!
The majority of pensions, including low cost SIPPs (self-invested personal pensions), currently pay next to nothing on cash balances - you'll be lucky to earn 0.5% a year. In order to access better rates you normally need a high end SIPP that lets you hold any trustee savings account, but even then the rates tend to lower than accounts offered to the public and you'll be charged hundreds of pounds a year for the SIPP wrapper itself.
The best compromise I can currently find is the James Hay iSIPP, which offers access to a limited range of savings accounts with half decent rates provided you have at least £50,000 invested. Within this you can earn 3.6% fixed for 2 years via Cater Allen Bank (a subsidiary of Santander). However, you'll need to factor in a £180 annual SIPP charge and a £50 fee to transfer in your existing pension. Plus, there may be transfer fees levied by your existing pension provider.
It's frustrating that pension providers don't offer decent cash rates, probably because it's a very profitable move on their part (they can effectively earn more interest on your money elsewhere and pocket the difference). And because your cash is trapped within the pension sphere there's nowhere to turn provided all the pension providers pay very low rates.
In their partial defence it's hard to get the same sort of rates from banks on pension money as retail customer accounts - in the case of the latter the banks hope to flog other products to the customer so are sometimes prepared to pay higher rates of interest to acquire them. Nevertheless, it's an unfair practice and I hope a pension company out there will be brave enough to break rank and finally give pension customers a decent deal on cash.
If any readers know of good pension cash deals out there please post details below, thanks.
Upon retirement rather than buy an annuity I was thinking of placing the crystalized funds on fixed deposit for a period of 5 years. At the moment some good institutions are paying in excess of 4 1/2% for 5 year funds. However, I understand that monies from a pension fund are classified as Trustee Monies and are subjuect to certain conditions and restrictions which could mean that a funds placed on deposit might only earn an interest rate of 2%. Is this correct?Answer
As you've discovered, money must remain in a pension until you take benefits, i.e. purchase an annuity (income for life) or draw an income. This means you have to use the cash account or fund(s) offered by your pension provider and herein lies the problems - the rates are usually rubbish!
The majority of pensions, including low cost SIPPs (self-invested personal pensions), currently pay next to nothing on cash balances - you'll be lucky to earn 0.5% a year. In order to access better rates you normally need a high end SIPP that lets you hold any trustee savings account, but even then the rates tend to lower than accounts offered to the public and you'll be charged hundreds of pounds a year for the SIPP wrapper itself.
The best compromise I can currently find is the James Hay iSIPP, which offers access to a limited range of savings accounts with half decent rates provided you have at least £50,000 invested. Within this you can earn 3.6% fixed for 2 years via Cater Allen Bank (a subsidiary of Santander). However, you'll need to factor in a £180 annual SIPP charge and a £50 fee to transfer in your existing pension. Plus, there may be transfer fees levied by your existing pension provider.
It's frustrating that pension providers don't offer decent cash rates, probably because it's a very profitable move on their part (they can effectively earn more interest on your money elsewhere and pocket the difference). And because your cash is trapped within the pension sphere there's nowhere to turn provided all the pension providers pay very low rates.
In their partial defence it's hard to get the same sort of rates from banks on pension money as retail customer accounts - in the case of the latter the banks hope to flog other products to the customer so are sometimes prepared to pay higher rates of interest to acquire them. Nevertheless, it's an unfair practice and I hope a pension company out there will be brave enough to break rank and finally give pension customers a decent deal on cash.
If any readers know of good pension cash deals out there please post details below, thanks.
Read this Q and A at http://www.candidmoney.com/questions/question611.aspx
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