Caught short in old age

Falling gilts have pushed down pensions, reports Andrew Verity

The event didn't make the front pages of many newspapers, but for tens of thousands of people, the effect was shattering. They discovered the income many hoped to receive for the rest of their lives suddenly dropped in value by up to 4 per cent almost overnight.

Those hit are among the most vulnerable sections in society - working people who are about to retire. Normally, they would expect to cash in their pension fund in order to buy an annuity, an income for life. In September, a fund of pounds 100,000 might buy an annuity paying a level life- time income of pounds 11,382 for a man aged 65. The same fund today buys just pounds 10,920.

For 8 million people with a personal pension or in "money-purchase" schemes, which rely on annuities too, the income they may be locked into for the rest of their lives will vary alarmingly. More frightening is the way the value of pensions has fallen in the past five or six years.

Annuities are mainly linked to the value of long-dated gilts. Considered a safe investment, these are Government bonds issued as a means of raising money. They can rise and fall, according to whether interest rates are high or low. Low interest rates have therefore affected annuity rates.

Figures from specialist adviser Annuity Direct show that in 1990, when rates were high, a fund of pounds 100,000 might provide an annual income of pounds 15,785. Now, it is under pounds 11,000. In other words, the falling gilt market has in the past six years pushed down pension incomes by more than 30 per cent.

Worse, the incomes available from annuities are likely to drop even further. Annuities also depend on mortality. The longer people live, the more it costs to provide a lifetime income.

This month, new figures are expected to show that people are now living 15 per cent longer than in the past, to the age of 82 for a man, on average, and 86 for women. Roughly, this means you need 15 per cent more fund to get the same life-time income. To get even pounds 10,900, a 65-year-old will need not pounds 100,000, but closer to pounds 115,000.

In his 1995 Finance Act, the Chancellor, Kenneth Clarke, tried to provide a solution, allowing people to get some income from their pension fund before they buy an annuity.

While investors waited for annuity rates to improve, they could draw an income worth anything between 35 and 100 per cent of what an annuity would give. By age 75, they would have to buy an annuity. The reform has spawned a huge pounds 1bn market in the new facility, known as "income drawdown". Has it worked?

Steve Bee, pensions manager at Prudential, the insurer, says: "The reform has not benefited those who suffered most because of low annuity rates. And those who have benefited never needed it in the first place."

There are three crucial reasons. The first is charges. To pay the person who sold the income drawdown facility will cost up to 5.6 per cent of your fund, or pounds 5,600 on a pounds 100,000 fund. That compares to 1 per cent in commission, or pounds 1,000, if you buy an annuity.

If the investments in your fund grow enough, they may make up for the charges. But the growth also has to cover any money you take out, otherwise you will get less in future years.

The upshot is that drawdown is only for the relatively well-off who do not need the maximum income. Most providers insist that you have a fund of more than pounds 100,000 unless you have income from elsewhere.

Those who need an escape from poor annuity rates can take advantage of some opportunities on offer. Most annuities are bought with pre-fixed incomes. More than 70 per cent of annuitants buy incomes fixed at a level rate. For a fund of pounds 100,000, this might provide an annual income of pounds 10,000.

Incomes can also escalate either by a fixed rate (3 or 5 per cent) or in line with inflation. But the price is an initial income up to 30 per cent less, or pounds 7,000 for the same fund.

Two options offer the chance to benefit from gains in the equity market. These are with-profits annuities and unit-linked annuities.

With-profits annuities link the income you get directly to the performance of the with-profits fund. It will vary according to the bonuses announced by the fund, which in turn depend on fund performance. Therefore, a fall in the market may trigger lower incomes. While incomes from with-profits annuities will only go up if bonuses do, unit-linked annuities benefit in full from rises in the equity market. But the pay-back is that unit- linked annuities offer no protection against stock market falls.

The simplest way of boosting the income from an annuity is to shop around. The overwhelming majority of policyholders buy annuities from the company that holds their fund. If they took took money elsewhere, their income could be vastly improved. Annuity Bureau figures show that, as of 4 December, a 60-year-old man with a fund of pounds 75,000 could buy an income of pounds 7,969 a year from Britannic Assurance. With Scottish Amicable, the annuity would be just pounds 6,700.

Annuity Bureau's managing director, Peter Quinton, said: "People who are purchasing an annuity must shop around. Not to do so would be the same as pouring money down the drain."

Start your day with The Independent, sign up for daily news emails
News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Robert De Niro has walked off the set of Edge of Darkness
news The Godfather Part II actor has an estimated wealth of over $200m
Arts and Entertainment
Fearne Cotton is leaving Radio 1 after a decade
radio The popular DJ is leaving for 'family and new adventures'
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Expect a new wave of fishing expeditions by fraudsters now we can invest our life savings

Cold callers and your pension: watch out for dangerous boiler room scams

Sean O'Grady received a cold call last week that was much more sinister than normal. Yes, someone wants to get their hands on his pension...

Fuel poverty could claim 100,000 lives over next 15 years, warns energy charity

The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter

MPs call for Equitable Life policyholders to be paid £2.8bn owed by government

Hundreds of thousands of people's policies were hit when the mutual insurer almost collapsed at the turn of the century

The elderly woman's family discovered the mistake

DWP criticised after it left a pensioner £26,000 worse off

The Department for Work and Pensions has been slammed after a series of cock-ups left an elderly pensioner £26,000 worse off.

The FCA has today issued a consultation paper on its plans to tighten up consumer credit rules to give consumers greater protection on guarantor loans and in other areas

Payday loan companies must publish their rates, says CMA

A 20-month investigation concluded that a lack of price competition between lenders has led to higher costs for borrowers

Vulnerable consumers are defined as those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the old

Financial companies are not meeting the needs of vulnerable consumers, says City Watchdog

The Financial Conduct Authority said the industry needs to start thinking about solutions to these challenges

The FTSE 100 is inching closer to its record high but can it maintain these levels?

In 1999 stock markets quickly tumbled, losing many a fortune in the process

Tax-free savings: Freedom dawns for the junior savers caught in low-income accounts

The parents of six million children stuck with low-interest saving accounts worth more than £5bn will be able to move the cash from this April. But what are their options? Samantha Downes reports

How much lower will mortgage rates go?

Another day, another cut. As lenders compete to offer the cheapest deals, Simon Read asks if borrowers should jump in now or wait for further falls

Are bills ruining your family life? Try the lover's guide to coping with debt...

If you're in the red and can't find a way out, it's time to get some help. Neasa MacErlean hears that relationships will suffer unless you are open with your partner, but there are organisations that will put you on the right track and get you talking

How to complain: From retailers to energy suppliers, it's easier than you think

When companies let us down, millions of us just take it on the chin. Simon Read shows how to make your voice heard

The dark side of debt: Descending into financial desperation is not due to self-indulgence

Three stories reveal financial desperation that was born of other, serious concerns, from being a victim of sexual assault, to losing a family member
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower