Annuities income hit as rates hit bottom

Posted on: 19 March 2009 by Gareth Hargreaves

More than half a million people retiring this year will see their income slashed as a direct result of the Government's attempts to resuscitate the economy.

retirement incomePension incomes being offered by insurance companies have plummeted over the past two weeks.

A 65-year-old man with a £100,000 pension fund would have been offered a level annual income of £7,128 from Legal & General on 6th March , before the Government started its latest stimulus plan.

Today, he would get just £6,920. If he lived to 85, he would be £4,160 worse off, according to financial adviser Hargreaves Lansdown.

These latest cuts compound the misery for savers who have now seen annuity rates fall 10% from their recent peak last July.

Assuming stock market falls have wiped a quarter off the value of people's pension pots, they would get an income of just £5,175 compared with £7,920 last July.

The combined effect of falling rates and stock markets makes pensioners a staggering £54,900 worse off over their lifetime if they live to 85.

These savers are the unintended victims of the Government's 'big idea' to breathe life into the economy.

The Bank of England is buying up to £150bn of gilts as part of its 'quantitative easing' stimulus package designed to encourage banks to start lending again.

But in buying these gilts it has forced up their price, which reduces the income they pay per pound invested. Incomes on 10-year gilts dropped below 3% this month for the first time in 50 years.

How does this affect your pension? Gilts are used by insurance companies to underpin annuities, which usually pay a fixed income until you die.

Most people buy annuities when they retire, and nine out of 10 savers are effectively forced to buy one before their 66th birthday because they need the guaranteed income. But everyone is forced to buy one at age 75.

Seven companies, including insurance giants Norwich Union and Legal & General, have cut their annuity rates since the quantitative easing programme got under way earlier this month. L&G has cut its rates twice by 3% in total.

Countless pensioners, who have already seen their savings income wiped out after successive base rate cuts, are faced with a stark choice - either accept this lower rate or carry on working.

Vince Cable, deputy leader of the Liberal Democrats, told Money Mail the Government's decision to buy gilts - rather than follow the U.S.'s example and buy corporate bonds as well - has been hugely damaging to pensioners.

“I'm not sure the Government has thought through the impact this would have on pensioners. It is utterly wrong that annuities should be compulsory. Pensioners are often being condemned to appalling returns for the rest of their lives,” he says.

Opposition parties have renewed calls for the Government to scrap rules which force savers to buy an annuity at age 75, or suspend the rules so no one is forced to buy an annuity in the current climate.

Shadow pensions minister Nigel Waterson says, “Quantitative easing is wreaking havoc with savers' pensions.”

“Yet again it is those who have done the right thing by saving diligently for their retirement who are bearing the brunt of the Government's attempts to get us out of recession. I am calling on the Government to help pensioners by suspending the age-75 rule.”

Research published by Prudential shows that 2.2m adults have been forced to put off their retirement plans because the value of their pension has been eroded. The insurer estimates those retiring this year are getting £2.9bn less pension income than those retiring a year ago. Experts say the situation is likely to worsen in the short term.

Nigel Callaghan, of financial adviser Hargreaves Lansdown, says, “The Government's quantitative easing plan is devastating news for those approaching retirement. There are likely to be further cuts.”

A Treasury spokesman says, “The Government recognises the importance of continuing to support pensioners through the global economic downturn. That is why we announced measures in the Pre-Budget report to build upon the help already in place for pensioners.

'The key thing is to ensure the economy gets moving to support people and help businesses. That will happen only if the Bank of England has the ability to improve the supply of money in the economy in addition to reducing interest rates.”

Get The Most From Your Pension

  • If you're a smoker or in ill-health, you could qualify for an enhanced annuity which will boost your income.
  • Consider alternatives: some more flexible pensions allow you to lock in to an annuity for a short period and then switch if there is a better rate elsewhere. Ask an independent financial adviser specialising in pensions for help.
  • Speak to an adviser who specialises in finding the best annuities. Well-known names include The Annuity Bureau, Annuity Direct and Hargreaves Lansdown.
  • If you're married then make sure you buy a joint-life annuity or your spouse will be left with nothing when you die.

How’s your annuity fairing?

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