Britain’s over 50′s are finding it increasingly difficult to maintain the level of savings required to fund a healthy pension annuity and therefore a comfortable retirement lifestyle, with many holding back on their retirement plans, according to the recent State of Retirement Report. This annual survey, carried out by LV= (Liverpool Victoria), reveals that nearly 70% of over 50′s yet to retire are more concerned about their retirement plans than a year ago.

Alongside the increased number of people in the UK experiencing retirement income concerns (called ERICs), just about 7% of the 1,500 over 50′s surveyed have been able to increase their level of long-term savings. And, the ongoing financial pressure of the current recession has forced around 20% of over 50′s who have yet to retire to cut the amount they are setting aside for their retirement and their eventual annuity purchase by an average of £137 per month.

The economic downturn we are currently witnessing has already significantly ruined some older worker’s retirement plans. Around two million individuals claim to have put back their retirement date due to this current recession, while about 25% say they have no idea when they will be able to actually give up their job. On top of all this, around 70% of ERICs’ primary concern is the increasing cost of food and utility bills, with over 60% of them worried about how little their savings might grow due to lower interest rates and 50% of them anxious about the reduced level of income their retirement savings will buy them. Never mind what annuity rates might be available when they eventually check out annuity quotes.

The report also reveals less than 33% of over 50′s have a reasonably clear idea of the value of their pension fund, with only 25% claiming to know how much their retirement savings are actually worth. A quarter those over 50′s in the survey expect to rely solely on their basic state pension in retirement and this rises to a third when it comes to women. And, despite widespread concerns existing about financial security in retirement, just about 20% of over 50′s have used an independent financial adviser (IFA) for retirement planning support and advice, but this climbs to around 25% for those within five years of their statutory retirement age.

More than half of the over 50′s surveyed have taken no financial advice whatsoever, with a similar number saying they actually trust their own judgement to make the best of their own financial situation. Of those taking financial advice from IFAs, 40% of over 50′s asked about ISAs, around 33% about low risk investment, a healthy 22% for pension drawdown and about 22% for other pension and annuity planning.

Interestingly, already one in ten of the UK’s over 65′s are still not fully retired, and this figure could rise quickly unless those nearing retirement age take steps to increase their pension savings, states  Mike Rogers, who is the group chief executive at LV=. While he understands that many people are focusing on their everyday costs and helping to support their families in this recession, he is still concerned that about 20% have cut their savings towards retirement. He suggests that it is vital older workers who question when they will be able to retire, really do review their options, as there are now many more contracts available providing both investment and income generating options than there used to be for people approaching retirement, but too few people are taking advice. As a direct result,  millions may miss the opportunity to secure themselves a comfortable retirement.

CEIOPS Solvency II guidelines now coming out could significantly reduce pension annuity rates, according to industry experts. Just recently, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) released 24 consultation papers setting out their draft advice on a wide range of important issues governing the detailed implementation requirements of the new Solvency II regulatory framework for insurance companies.

The advice included their view that the discount rate that should be used in valuing insurance liabilities should be based on the European Central Bank (ECB) AAA government bond yield curve. But Watson Wyatt, leading industry consultants, said there was no formal advice actually set out on the controversial issue of the “illiquidity premium” that might be used in the calculation of illiquid liabilities, such as pensions in payment (annuities), at a higher discount rate, and the paper made clear the majority of CEIOPS members did not back such an approach. It said the lack of such a premium would have “far reaching” ramifications for insurance companies as it would increase the cost of providing pension annuities.

Watson Wyatt’s global head of risk & value services for life insurance companies, Mark Chaplin said that if further lobbying by the UK insurance industry as a whole, the Actuarial Profession, the Financial Services Authority (FSA) and the government on this issue proves to be unsuccessful then the social policy implications could be really serious and the demise of the compulsory purchase annuity (CPA) in its current form may be imminent.

The UK annuity industry has been lobbying for quite a while as to the use of a liquidity premium in valuing reserves and its absence from this far reaching consultation paper is likely to re-energise the debate. Let’s just hope it is not to noticeable when you eventually start looking for annuity quotes and the best annuity rates for your circumstances.

Philip Brown, who has the title of Head of Retirement Products at Partnership Ltd, a leading enhanced annuity provider, has some essential tips to help consumers secure the best retirement income. He suggests that one of the most valuable roles an independent financial adviser (IFA) can play is in helping their clients make the important transition from accumulating (or saving) their pension pot to transforming it into a worthwhile retirement income.

As a process this does require careful consideration because the decisions taken can literally dictate a  standard of living for the rest of one’s life. Regardless of efforts by both the Financial Services Authority (FSA) and the Association of British Insurers (ABI), it is still the case that over 61% of over-55′s still don’t realise they can take arrange a better retirement income on better annuity rates with someone other than their original pension provider. 

While pension companies are now obliged to really make this choice clearer to retirees, they still tend to present their own pension annuity contracts as the simplest choice and least painful option at retirement. On top of this IFA’s should make sure they are told about any lifestyle or medical conditions a client might have as the client might be entitled to increased rates via an enhanced annuity contract. This is not a niche market but analysis suggests that 40% of annuitants could qualify for an enhanced rate. To help IFA’s, the UK’s leading enhanced providers have agreed a Common Quotation Request (CQR) form providing all the key health questions to ask clients.

And, as an annuity is perhaps the only financial contract where a client being in poor health can work to their advantage, it really is worthwhile getting everything disclosed. Very important if the client might have a medical condition that requires additional medical verification.

Lastly, an IFA should take time to work with the client to identify and balance immediate income requirements sensibly against the potential benefits of opting for an escalation annuity and/or spouse’s income. The different options available can seem confusing but are well worth explaining. And, with interest rates pretty much at historic lows and pension annuity rates well off their highs seen in the middle of last year, retirees may be tempted to delay their purchase. However, if a 65-year old man were to defer his purchase just one year and his pension pot increases by around 6% in the interim, calculations suggest it would take almost a decade to recover the income he missed out on.

As you read this I should be in the middle of a cruise to the northern tip of Norway, to see the wonderful sights that nature has bestowed upon us, and I’m really looking forward to it. Naturally, this online annuity service will continue to function in my absence.

Why am I telling you this? Well, I am going on this cruise with my wife to celebrate 25 years of marriage…note I did not say 25 years of wedded bliss, because everyone has a few off days. Now then, we are going together because it is a joint celebration. Note the word joint, because that’s something I am getting to in relation to annuity quotes.

We are having this trip as a joint event, and arranging your retirement income should also be seen as a joint event. You should not forget about your partner when you look for annuity rates. No, he or she should very much be included. Why? Because doing this properly can ensure that on your premature death an income can continue to paid to your partner, typically at 33%, 50%, or 100% of the income you get before death, and it is payable to your partner until their eventual death. And if you don’t do things on a joint basis, and stick to a single annuity then any income you get will die with you, leaving you partner financially poor and pretty hacked off. Something to think about.

I’m off to check the lifeboats (again).

A lifetime pension annuity converts your money purchase pension fund into an income for the rest of your life in retirement, no matter how long you live. They are are sold by life insurance companies and you can add various options and get different types depending on your personal needs and circumstances.

You can get these pension annuities to pay out to your spouse or partner on your premature death; or
you could get impaired life or enhanced annuity rates, which may give a higher income if you have an illness, take prescribed medication or have a medical condition, or are a smoker. The Pensions Advisory Service (TPAS) actually offers an online planner to help you think about the options that might be suitable for you.

These annuities pay out an income which depends upon the amount left in your pension fund after taking any tax-free cash. You must take any tax-free cash lump sum before your 75th birthday.
The income also depends on whether your fund includes national insurance (NI) rebates because you contracted out of the additional State pension; if so you must buy a 50% spouse’s pension with funds arising from these rebates if you are married or have a civil partner.

The income payable also depends on your state of health or lifestyle, and you could get a far higher income if your health or lifestyle threatens to reduce the length of time you are expected to live. Naturally another key factor in all this is your age. The older you are the higher the annuity rates on offer tend to be, because, on average, an older person has logically got fewer years left to live than a younger person. However, because people are living longer these days, rates are adjusted from time to time to reflect this. So if you delay making your purchase you could be taking a risk.

Your gender also effects the income you get. It is the norm for the starting income from the same size of pension pot to be higher for a man than for a woman, of the same age. This is because, based on  averages again, the life expectancy of a man is actually less than a woman of the same age.
The benefits you choose also have an effect, for example: whether the plan is for you, or for you together with your spouse or partner; or if you opt for an escalating income. If you opt for it to pay out for a minimum number of years (say 5 or 10), even if you should die during that time, then your annuity income will be effected.