Our Ever Shrinking Pension Payouts?
Pension poverty is a recurring theme on my blog. I saw this coming years ago, but it's much worse than I envisioned. Oddly enough, some people think we shouldn't address the retirement crisis, just let these people suffer and live on a fraction of what they were expecting to retire on comfortably.
Millions approaching retirement could be devastated by the worst pension payouts since records began.
Despite saving the same amount of money into their pensions, they face the dire prospect of getting about half the income they would have received 15 years ago, research reveals today.
It comes on top of the collapse in final salary pension schemes, with millions locked out of the best type of retirement provision.
Experts said employees who want to retire are facing a nightmare which no previous generation has had to cope with. The plunge in pension payouts is because annuity rates have nose-dived. Annuities offer a guaranteed monthly income to those who have saved into a pension pot.
But over the last month several major investment firms, such as Aegon, Aviva and Legal & General, have started to cut their annuity rates.
Their rivals are almost certain to follow and experts predict that rates will fall even lower over the coming months. Around 50,000 people a year buy an annuity, with up to £20billion of their hard-earned cash ploughed into the investment products.
The decision about which annuity to buy, when to buy it and which company to buy it from is one of the biggest financial decisions a person ever has to make.
Because it dictates how much money a pensioner will get every month for the rest of his or her life, it can mean the difference between enjoying a comfortable retirement, and a retirement surviving at the most basic level.
Today's research, from the financial information firm Moneyfacts, looked at the annuity which a £10,000 pension pot can buy.
In 1995, a 65-year-old man buying an annuity would have received an average annual payout of £1,111. Today, a man of the same age with the same pension pot would get just £606 a year, a drop of 5 per cent which shows how rapidly annuity rates have plummeted.
Just 12 months ago, the same fund would have bought a pension of £647 a year.
The average pension pot is about £30,000. For a man aged 65, this would have resulted in an annuity worth around £3,300 a year in 1995, compared with just £1,800 today.
The report's author, Richard Eagling, said the findings would be 'a rude awakening for many'.
The victims will be 'baby-boomers', born after the end of the Second World War who are now starting to retire.
After a lifetime of saving into a pension, many will be shocked and disappointed by the income that they will get from it, and feel that they are being forced into staying at work.
Dr Ros Altmann, a pensions expert and former Treasury adviser, said: 'Pension savings are being decimated by these appalling annuity rates.
'These poor people have saved all their lives, and they are being locked into these terrible annuity deals for the rest of their lives.'
Tom McPhail, head of pensions research at the independent financial advisers Hargreaves Lansdown, predicted that the worrying situation will get even worse.
He said: 'This is a retirement crisis that is happening now. Annuity rates are likely to fall further in the immediate future.'
He urged people to shop around when they come to cash in their pension, rather than take out an annuity with their pension company.
About two-thirds of people fail to look elsewhere, despite the fact that it is almost always possible to find a better deal.
The rates vary according to key issues, such as age, gender and physical health.
The annuity rate crisis highlights the growing pensions apartheid in Britain between public sector workers and everybody else.
State workers get a gold-plated 'defined benefit' pension, which means they do not have to buy an annuity.
The majority of private sector workers do not even have a pension. If they do have one, it is likely to be a 'defined contribution' pension, which means they do have to buy an annuity.
More than 40 per cent of employers are threatening to slash the amount of money they pay into their workers' pensions over the next few years.
At present, bosses are under no legal obligation to pay into a pension for workers, but from October 2012 they must pay at least three per cent of salary into a retirement pot for every employee.
A survey by the Association of Consulting Actuaries of firms employing more than 1,000 people found that 41 per cent of bosses may cut the amount they currently pay into their existing pension scheme, or close existing generous pension schemes and sign everybody up into a new, less generous pension.
Anything we do now is too late. It's a disaster and what's going on in the UK is happening across Europe and will soon reach North America. Historic low rates have decimated savers, forcing them to speculate in the markets to try to make up for the lost income due to low annuity rates. But in this wolf market, forcing people to speculate is like herding lambs to their slaughter.
Policymakers around the world need to first admit there is a retirement crisis and then have to formulate a comprehensive strategy to reform the financial system and retirement systems so that they limit the damage as much as possible. Too many people are slipping through the cracks, and my biggest fear is that the retirement crisis will get much worse as demographic pressures swamp us.
Below, listen to an interview with Dr. Ros Altmann which took place last year. If we ignore this crisis, it will spread and end up costing us a lot more than if we took measures to address it now. If there was ever a time for pension reform, now is it. This should serve as a wake-up call for those politicians and analysts who foolishly believe that everything is fine. Nothing can be further from the truth.