A Reader Sent Me This on UK Pensions

HOW PENSION INCOME HAS FALLEN 20% IN JUST 3 YEARS

Figures show that an average retirement pot for users of its annuity service is £56,000

Monday July 4,2011 Daily Express U.K    By John Chapman

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EMPLOYEES retiring in the private sector are up to 20 per cent worse off than those who finished work just three years ago, according to new figures that reveal the pensions misery awaiting workers.

Their nightmare future was outlined by experts who warned of falling annuity rates and volatile stock markets.

In contrast, public sector workers, currently locked in dispute with the Government over final salary schemes, are enjoying pensions unaffected by annuity rate falls.

The fall in income for private workers indicates the fragility of “defined contribution” (DC) pension schemes which have replaced their final salary pensions.

The shrinking purchasing power of pensions pots over the past three years has been starkly revealed by the latest “DC Tracker Index” from financial experts Aon Hewitt.

Figures show that an average retirement pot for users of its annuity service is £56,000.

John Foster, of Aon Hewitt, said: “If the individual, aged 60, takes 25 per cent of this as cash, it would leave around £42,000 to buy the pension. In 2008 this sum would have bought just over £1,400 a year, compared with just under £1,200 today.

“The underlying performance of the funds over that time would have been growth of 11.7 per cent.”

He said that the average size of a pension was small because a DC scheme is still relatively new.

Meanwhile public sector workers, although furious over proposals to change final salary pensions, are still safe in the knowledge they are cushioned against the vagaries of annuities.

The proposed alternative for them is a career average plan which means their pension income is still a defined benefit and, crucially, still guaranteed by the taxpayer.

Private sector workers have to get by on defined contribution schemes where the pension income depends on the amount the worker and employer contribute, charges, investment performance and annuity rates. Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “DC pensions are by their very nature unpredictable. Investors can and will lose out as a result of movements in shares and bonds close to the point of retirement.

“Ironically, given the public sector protests, the least volatile and most predictable pension outcomes are provided not through final salary schemes but through career average arrangements, where the pre-retirement risk to members is effectively non-existent.”

Meanwhile, taxpayers face an annual £7.4billion bill because retired civil servants now outnumber those employed in the service for the first time, it emerged yesterday.

Startling official figures show there are 17,000 more people drawing a civil service pension than are currently working within the sector.

The total bill represents a 30 per cent rise in just four years.

The figures came to light after thousands of public sector workers took to the streets last week over planned cuts to pensions.

But claiming the figures strengthened the case for reforms, pensions experts said the runaway costs were “unsustainable.”

Experts warned of a similar situation in Britain’s schools. The number of retired classroom staff receiving a teacher’s pension will overtake the number of those working within the next three years.

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