Pensioners Face 56 Percent Pension Cut Due to Plunging Retirement Plans

Half a Million Savers' Retirement Plans Shattered as Payouts from 'Crippled' With-profits Pensions Plunge

Half a million savers' retirement plans shattered as payouts from 'crippled' with-profits pensions plunge

February 29, 2012

This Is Money - Hundreds of thousands of savers have had their retirement hopes dashed by the banking crisis and a crash in payouts on with-profits pensions.

Those reaching pension age now are getting £4,975 less a year than an identical saver who retired five years ago, Money Mail research has revealed. They have been hit by a toxic combination of plunging payouts on with-profits pensions, and a fall in annuity rates — which turn pension savings into an income for life.

The worst-performing fund, Britannic, has delivered a payout of £73,612 for someone who has saved £200 a month for 20 years. This buys an annual income of just £3,861 for a 65-year-old man retiring today. But in 2007 someone who had saved the same amount over 20 years would have received a payout of £142,884. From this they could have bought an annual income of £8,786 — so today’s pensioner faces, in effect, a 56 per cent pension cut.

Although Britannic is by far the worst performer, it’s a similar story across the board with all the other giant insurers.

In the past five years payouts from similar policies have dropped by as much as a third while annuity rates have fallen by 15  per cent.

It highlights the terrible legacy of with-profits pensions, which were sold in a commission-driven frenzy.

At the height of their sales in the mid-Nineties more than half a million savers relied on with-profits to provide them with a decent retirement. At the time, the average payout on a similar policy was £265,507, figures from Money Management show.

Patrick Connolly, from independent financial advisers AWD Chase de Vere, says:

‘With-profits pensions have left a crippling legacy.

‘Payouts keep falling regardless of the performance of with-profits funds and will continue to do so for some years to come. Combined with falling annuity rates, savers are being hit by a double-whammy. They will be far poorer in retirement than they originally thought.’

With-profits policies were sold to those looking to build a retirement fund through a personal pension — usually when they had no company pension offered — and the self-employed.

Policyholders were told their money would grow, as guaranteed annual bonuses were added to their policies. The point of with-profits plans was that pension companies would put money aside from good years to smooth out the returns in the bad years when investments underperformed.

But there has been a headlong cut in payouts as insurers slashed their annual bonuses after realising they had paid out too much in previous years.

Respected with-profits offices such as Legal & General and Aviva have also cut payouts by 23  per cent or more. A policy with General Accident — now part of Aviva — is down 24  per cent at £84,728, against £110,888 five years ago.

This sum would have bought you a pension of £6,819 a year, but the £84,728 available this year buys only £4,443 a year in payouts.

The best annuity deal currently available is with Axa Sun Life, now part of Friends Life, giving savers £99,362, and a yearly income of £5,212. Although this total return is down only 6  per cent on five years ago, the annual pension is actually 20  per cent lower because of the fall in annuity rates.

Annuity rates have plunged since 2007 because of a Bank of England policy to pump more money into the economy, called quantitative easing (QE).

With QE the Bank of England buys government debt, called gilts, from banks. The theory is this will give the banks spare cash, which they can lend to the rest of the economy. As this money drips down through the food chain it should be passed on to consumers and small businesses to help the economy grow. But there are damaging side-effects to this that are hurting pensioners.

When the Bank buys gilts it causes their price to soar, which lowers the rate of interest they pay. These same gilts are used to pay for annuities, which give retirement income in pensions.

The drop in annuity rates means a man retiring now aged 65 needs £285,000 in his pension pot if he wants to retire with an income of just under £15,000. That’s £45,000 more than someone retiring in the same circumstances five years ago.

Billy Burrows, director of Better Retirement, which seeks out the best annuity deals for those coming up to retirement, says:

‘Annuity rates have fallen sharply in the last few years. The big measure is that quantitative easing has pushed them down.

‘Pensioners today are paying for the mistakes of the banking crisis.’

While interest from gilts has fallen, their value has soared. But pensioners still in with-profits pensions have only enjoyed limited benefit from the rise in the price.

Payouts have fallen in those plans with a substantial portion in fixed rate investments, including gilts. Standard Life has 51  per cent of its with-profits fund in fixed interest, Legal & General 48  per cent and Aviva 32  per cent, but payouts still fell.