Your Money: They're fiddling while pensions burn

The Government continues to maintain that there is no pensions crisis and, therefore, no need for any decisive action. It claims it has plenty of time to work out ways in which to encourage people to save more for their retirement. However, the evidence suggests that the opposite is in fact the case.

The Government continues to maintain that there is no pensions crisis and, therefore, no need for any decisive action. It claims it has plenty of time to work out ways in which to encourage people to save more for their retirement. However, the evidence suggests that the opposite is in fact the case.

Final salary schemes are closing at alarming speed, the stock market continues to perform abysmally and those nearing retirement are discovering that they will have a lot less cash in their old age than they thought. If that's not a crisis, I don't know what is.

Before the Government gets caught up in a war, putting everything else on the backburner, it should pay attention to new research predicting that annuity rates, which were cut by most life insurers last month, are going to fall further in the next year. Legal & General, Norwich Union, FE Life, AXA, Standard Life, Prudential and Canada Life all reduced their annuity rates in January. Further cuts will be devastating for those who have no choice but to buy an annuity now.

Key Retirement Solutions, which specialises in equity release, says that 80 per cent of independent financial advisers believe annuity rates will fall over the next 12 months by an average of 2.5 per cent. One in six predict they will decline even more – by 5 per cent or above. Given that rates fell 12 per cent last year, this is a massive fall.

An annuity is the guaranteed income for life which you must purchase with at least three-quarters of your pension pot by the age of 75. In itself, it is a sensible product because it guarantees an annual income, no matter how long you live.

But annuities are unpopular because they are inflexible – your estate doesn't inherit the money invested once you die – and desperately in need of reform.

Annuities do offer you certainty, while the insurance company takes quite a gamble since you could live for five, or even 25, years after purchasing the policy. But this is part of the problem: annuity rates are falling as insurance companies continue to adjust to increased life expectancy.

If you are about to buy an annuity, you should shop around for the best rate. You don't have to buy your annuity from your pension provider – and probably shouldn't – since you will almost certainly get a better deal elsewhere. Just because a company provides very good pensions doesn't mean that it is excellent when it comes to annuities as well.

In some cases you can boost your income by as much as 30 per cent by shopping around. If that's not an incentive to go to a little extra trouble, I don't know what is.

m.bien@independent.co.uk

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