Low rates hurt pensions

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REACHING retirement with a personal pension scheme or additional voluntary contributions when interest rates - and therefore annuity rates - are unfavourably low is a nightmare that came true for tens of thousands in 1993 and 1994.

Interest rates had reached a 20- year low, and tax rules meant the pensioners had to buy an immediate annuity for a retirement income. The amount of income a lump sum will buy is decided by how much interest it will earn plus a slice of capital. It varies with age and sex. Right now, a £10,000 lump sum buys a 65-year-old man an annuity of £1,150. But early last year it bought only £990, fixed for life. For the same sum, anybody retiring in identical circumstances in 1990 when rates were high could have bought a £1,550 annuity.

This not a problem for the company employee retiring with a percentage of final salary, but the increasing dependence of employees and the self- employed on money-purchase schemes has threatened to make the problem commonplace at the bottom of every economic cycle. It has created yet another element of uncertainty over pensioners' incomes.

Twelve months ago, Equitable Life tried to launch a managed annuity fund to allow a pensioner to receive some income without immediately fixing the annuity permanently, but the Inland Revenue rejected it out of hand.

The new Finance Act will allow pensioners with money-purchase pension plans and AVCs to take an income without locking it, and most of the big life assurance offices should offer transfer facilities for existing plans.

Meanwhile, Provident Life, or Winterthur Life as it now calls itself, is ready with a Pension Income Portfolio to enable pensioners on retirement to draw any annual income allowed under the terms of their pension while maintaining a tax-free growth fund and the option to purchase a conventional annuity up to the age of 75.

It is available to existing clients and to transfers from other personal pension, AVC and FSAVC schemes.

The lump sums can be invested in a range of funds with varying degrees of risk and reward and there are dependants' benefits if the policyholder dies.