According to Winterthur Life, a man of 55 who invested pounds 10,000 in an average performing unit-linked pension fund in 1981, would have retired 10 years later with a fund of pounds 54,725, which would have bought an annual income of pounds 8,072 a year for life. By this year, his counterpart who invested pounds 10,000 in 1989 would have a pot worth pounds 31,777, which would have bought an annuity of only pounds 2,747. An average managed pension fund would have generated even less money.
Most people take up their pension plans when they stop work, but this is only because most retirees need money as soon as they stop earning. They are under no obligation to cash in their pension plan and, since 1995, they can choose to move the capital into an income draw-down plan, keep the capital and draw an income instead. A quarter of all the personal pension fund capital now goes into income draw-downs, although the average amount in a draw-down plan is pounds 150,000-200,000, compared with a modest pounds 30,000 average available to buy an annuity.
But everyone with an income draw-down or a pension plan is obliged by law to buy an annuity by the time they are 75 (hence the full title, compulsory annuity) and a growing number of people are now reaching this threshold. They will get an annuity around 40 per cent bigger than they could have taken at 65 because they will have less time to draw it, but the rates of return will still be historically low. Awareness of falling annuity rates is also discouraging younger people from investing in a pension plan, but the pensions minister so far sees no alternative to compulsory annuities at 75.
But there is a viable alternative, says John Moret, director of sales and marketing at Winterthur. He says that the 75 limit should be abolished, although everyone by then should be required to take an income of some sort, either an income draw-down plan or a "term annuity" fixing the annual payment for three to five years, after which terms would be renegotiated. Even if annuity rates continue to fall, life expectancies would shorten at each renewal date, raising the annuity available, he says. At least the Government should abolish the compulsion to buy an annuity and allow the insurance industry to invent new products to meet the need.