Personal Finance: Retiring? You're in for a shock

As annuity rates fall, make the most of your personal pension plan, writes Clifford German

A GENERATION of people approaching retirement are watching the likely value of their personal pension payments shrink like a snowball in the sunshine.

Worse still, many don't even realise how their pension is calculated and the shock will be all the greater when they do stop work.

As recently as 1990, a married man of 60 with a wife of 57, cashing in the accumulated value of his personal pension pot and buying an annuity, could expect to take a tax-free lump sum and get an annuity (an annual taxable income) of 13 per cent for life in exchange for the capital.

The sum was guaranteed for the first five years even if the pensioner died, with a half-pension for the wife in that event.

Four years ago, the annuity would be almost 10 per cent a year on the balance. But annuity rates have fallen steadily since then. Last week a newly bought annuity would be only 7.3 per cent of the accumulated fund. A single man could get a better rate if he waited until 65 or 70 before buying the annuity.

Up to 15 per cent of people retiring could qualify for an impaired life annuity which pays a higher rate for people with known medical conditions, smokers and the overweight, but relatively few companies offer them (Stalwart Assurance is the best known).

Meanwhile, a woman would get even less than a man of the same age, and anyone who wants an indexed annuity which goes up by 3 or 5 per cent a year (or just in line with the retail price index) will get less than the going rate of return to start with. Look at BBC2 Ceefax, page 260, for detailed examples.

Rates for each type of annuity vary slightly from one insurance company to another, and pensioners are free to use their maturing pension plans to buy annuities from the best offers currently available.

Although some providers will charge pensioners who buy their annuity from a different provider, most will not, so it is worth shopping around.

Until recently it was assumed that falling annuity rates did not matter because the values of most pension funds were rising in line with the shares and bonds in which they were largely invested.

But a recent calculation by the Annuity Bureau, a specialist adviser on annuities, pointed out that in spite of share values rising 21/2 times in the last eight years, anyone who delayed taking an annuity in 1990 would only get 40 per cent more income starting in 1998 and would take nearly 20 years to make up the eight years of annuity payments foregone in the meantime.

If share prices are now set to fall, the prospects will become even less attractive, because no one expects annuity rates to rise again sufficiently to compensate for falling asset values. They could even go on falling.

It is not something anyone with more than five years to retirement needs to worry about, but anyone retiring in the next two to five years needs to check where their pension fund is invested.

If they are heavily invested in shares or unit trusts, it might be worth asking the managers if money can be switched into bonds or cash next time the stock market goes up.

Anyone planning to retire in the next year has has some hard choices. Some pensioners may need to choose a flat-rate annuity rather than an inflation-proofed one to maximise initial income.

If the market continues to fall, another possibility is not to buy an annuity immediately and just wait and see, but not everyone can afford to do without their pension income in the hope of an upturn in annuity rates.

A further option is to choose a "phased" annuity, and take only part of the pension if the market remains depressed, or to choose an income draw-down plan rather than an annuity.

Back in 1995, the government agreed to let personal pension holders defer buying their annuity and switch to an income draw-down scheme - a new product on to the market which allowed them to take an income out of their personal pension fund and keep the rest invested.

But by taking the maximum income allowed from a draw-down plan, it is easy to deplete the capital so that there is less with which to buy an annuity when it becomes compulsory to do so at the age of 75.

Phased annuities and income draw-downs are also costly to set up and really are only suitable for people with pounds 250,000 to invest who are able and willing to wait for a minimum of five years before they need to buy their annuity.

Alternatively, use the pension pot now to buy a with-profits annuity (available only from Equitable Life, the Prudential and Scottish Widows) or a unit-linked annuity (from Equitable Life, Allied Dunbar and Scottish Widows).

However, if the value of the with-profits fails to match the chosen payment profile, so will the future payments.

A unit-linked annuity invested wholly in shares is even more risky. Payments will rise and fall each year in relation to the dividends on the shares or the units in which they are invested.

Start your day with The Independent, sign up for daily news emails
peopleJonathan Ross has got a left-field suggestion to replace Clarkson
Lewis Hamilton secured his second straight pole of the season
f1Vettel beats Rosberg into third after thunderstorm delays qualifying
Arts and Entertainment
The teaser trailer has provoked more questions than answers
filmBut what is Bond's 'secret' that Moneypenny is talking about?
Johnny Depp is perhaps best known for his role as Jack Sparrow in Pirates of the Caribbean
peopleBut how did he break it?
football This was Kane’s night, even if he played just a small part of it
travel Dreamland Margate, Britain’s oldest amusement park, is set to reopen
Founders James Brown and Tim Southwell with a mock-up of the first ever ‘Loaded’ magazine in 1994
Threlfall says: 'I am a guardian of the reality keys. I think I drive directors nuts'
voices The group has just unveiled a billion dollar plan to help nurse the British countryside back to health
The Westgate, a gay pub in the centre of Gloucester which played host to drag queens, has closed
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss