Question
I've been seeing articles about so called Third Way pensions. On the face of it they sound as if they may be a better option at the moment than drawdown or annuities. Do you please have any information or links to information which I can use to research the topic?Answer
I'm in two minds about 'third way' pensions - which basically offer some form of protection to growth and/or income while your pension fund remains invested.
My cynical view is that they're just a money-spinner for insurers and financial advisers, with most customers unlikely to end up better off versus a decent conventional pension or annuity.
Being more generous, they might give some customers peace of mind and protect against a crash in markets and/or annuity rates.
For a fuller description of how they work along with pros and cons take a look at my answer to this earlier question, but a brief overview below.
If you've yet to reach retirement age then 'third way' pensions allow you to invest in protected investment funds. So you potentially benefit from upside (often with a cap) while avoiding the worst of market falls.
When you reach retirement age third way pensions can allow you to defer buying an annuity and/or draw an income while your pension fund remains invested, again with some protection. The income rates tend to be lower than conventional annuities at the outset (with a minimum amount guaranteed for life) but could rise if strong fund performance generates growth after income withdrawals.
Both scenarios sound great in theory. But the (potentially big) downside is that protection costs, so you'll normally incur additional annual charges and end up with a rather expensive pension fund. While short term protection can be valuable (albeit expensive), I'm less convinced for the need longer term if you have a sensibly diversified or cautious portfolio.
So, yes, depending on market conditions some customers could benefit from this type of pension or at least sleep peacefully if nothing else (not to be undervalued). But I think the majority would be better served by a sensibly invested conventional pension until retirement age followed by an annuity or income drawdown to provide retirement income.
It's not out of the question that third way pension annual charges could top 3%, which is way too high and rather negates the potential benefits.
I don't expect everyone to agree with my view, but unless charges fall (unlikely, as protection isn't cheap) I can't see myself using one.
I've been seeing articles about so called Third Way pensions. On the face of it they sound as if they may be a better option at the moment than drawdown or annuities. Do you please have any information or links to information which I can use to research the topic?Answer
I'm in two minds about 'third way' pensions - which basically offer some form of protection to growth and/or income while your pension fund remains invested.
My cynical view is that they're just a money-spinner for insurers and financial advisers, with most customers unlikely to end up better off versus a decent conventional pension or annuity.
Being more generous, they might give some customers peace of mind and protect against a crash in markets and/or annuity rates.
For a fuller description of how they work along with pros and cons take a look at my answer to this earlier question, but a brief overview below.
If you've yet to reach retirement age then 'third way' pensions allow you to invest in protected investment funds. So you potentially benefit from upside (often with a cap) while avoiding the worst of market falls.
When you reach retirement age third way pensions can allow you to defer buying an annuity and/or draw an income while your pension fund remains invested, again with some protection. The income rates tend to be lower than conventional annuities at the outset (with a minimum amount guaranteed for life) but could rise if strong fund performance generates growth after income withdrawals.
Both scenarios sound great in theory. But the (potentially big) downside is that protection costs, so you'll normally incur additional annual charges and end up with a rather expensive pension fund. While short term protection can be valuable (albeit expensive), I'm less convinced for the need longer term if you have a sensibly diversified or cautious portfolio.
So, yes, depending on market conditions some customers could benefit from this type of pension or at least sleep peacefully if nothing else (not to be undervalued). But I think the majority would be better served by a sensibly invested conventional pension until retirement age followed by an annuity or income drawdown to provide retirement income.
It's not out of the question that third way pension annual charges could top 3%, which is way too high and rather negates the potential benefits.
I don't expect everyone to agree with my view, but unless charges fall (unlikely, as protection isn't cheap) I can't see myself using one.
Read this Q and A at http://www.candidmoney.com/questions/question709.aspx
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