Longer liveslead to smaller pensions

Plans to use organs from foetuses for spare part surgery have sent alarm bells ringing among actuaries, who decide rates for life insurance and pension plans. The idea may sound like science fiction made flesh. But then so did bypass surgery and heart transplants in their time.

Plans to use organs from foetuses for spare part surgery have sent alarm bells ringing among actuaries, who decide rates for life insurance and pension plans. The idea may sound like science fiction made flesh. But then so did bypass surgery and heart transplants in their time.

Patterns of life expectancy are changing fast. There has been a 20-per-cent drop in the number of men dying between 50 and 60 compared with the figure in 1980, according to the Continuous Mortality Investigation Bureau, the actuaries specialist group.

Those changes are having a dramatic effect on pensions. More people now survive to receive them and they live ever longer in retirement. Meanwhile, low interest rates, and a shrinking gilts market have also cut back annuity rates. A man of 65 turning a pension fund of £100,000 into an annuity will only get a pension of about £9,000 a year. That is 40 per cent less than the £15,000 he would have got for the same sum 10 years ago.

"Annuity rates which decide your pension are at a 30-year low," says Tom McFail, pensions specialist at Wolverhampton-based financial advisers Torquill Clark. "Inflation is now running at between 2 and 3 per cent, but it could easily accelerate - and retirement can last a long time."

Even so, he warns: "Very few people can afford to postpone taking a pension until times improve. Experts talk of using drawdown - taking a little of the capital from your pension savings to provide you with an income in the hope that investment returns will push up the value of what is left. But that only makes sense for people with well over £100,000 in pension savings. Eventually, everyone has to turn at least three quarters of their pensions savings into income."

The post-war baby bulgers are now well into middle age and pensions worries. They will soon have to worry about just what form of pension they want their savings to provide.

The level annuity provides most money immediately, and that is what the vast majority of people take. But even a 3-per-cent inflation rate will cut your money's buying power by over 25 per cent within 10 years - and most people spend far longer as pensioners than that.

Escalating annuities start lower, but typically rise at a steady 3 or 5 per cent a year for as long as they are paid. But taking them means forgoing a lot of income later on. Assume you are a man of 65 who takes an annuity rising at an annual 3 per cent. In year one, you will only receive between 60 or 65 per cent of the income you could collect for the same sum by taking a level annuity.

In the case of investment-linked annuities, pensions groups can vary the pension according to the performance of the stock market. People should do better with them than with traditional annuities - on average. But they involve risk - and according to Tom McFail, only make sense if you have a pension fund of over £100,000. The crucial thing is to shop around for the best deal when choosing an annuity.

"Choose the wrong company, and you can get 25 per cent less than what a good group will give you," says Tony Quintin of the Annuity Bureau. "There are big differences even among the top ten rates. Men of 65 can get £9,356 a year on a basic annuity from Friends Provident, but only £8,430 from Scottish Amicable - 10 per cent less. Matching rates for women start at £8,511 from the Prudential, while Scottish Amicable offers 12 per cent less".

Annuity Bureau 020 7902 2300; Torquill Clark 0800 0561836