£309,000: the unreported annuity shock

  • 21 January 2020
  • 20 minutes
  • The traditional way of accessing your pension has been to buy an annuity.

  • But a combination of increasing longevity and falling interest rates have reduced the annuity income you could hope to achieve

If you are close to retirement, the chances are that when you started your pension savings, a comfortable retirement seemed like a breeze.

According to research carried out for us by Moneyfacts, twenty-five years ago, a £100,000 pension pot went a long way. Converted to an annuity it would have bought a chunky £11,130 in annual income [1]. However, a combination of low interest rates and higher life expectancy has seen the pension landscape change. Today that same £100,000 could buy you an income of just £4,100 [1]. Achieving a comfortable retirement with an annuity is now far more elusive.

Things ain’t what they used to be

This shift has a huge impact on the amount you need to save to achieve the income you hope for in retirement. The average salary in the UK is around £29,588 [2]. If we take into consideration the New State Pension of £8,767 [3], you would need to generate additional income of around £21,000 to achieve this.

At today’s annuity rates that requires a pension pot of £485,600. Twenty-five years ago the same level of income could have been achieved with only £176,000 [1].

That’s a significant difference of £309,000.

And things don’t look as if they’ll get better any time soon

Short of a lottery win, or an unexpected inheritance, what can you do? You can certainly lament inter-generational unfairness, but gloomily waiting for the situation to change probably isn’t the answer.

Today, £100,000 could buy you an annuity income of just £4,100.

The Bank of England has made it clear that investors need to get use to lower interest rates as the economy continues to show signs of slowing growth. It has likened the economy to a slow puncture [4]. And while life expectancy gains may have slowed, they remain a reality. This is a tough pill to swallow if you are now at or near retirement without the time or the resources to make up any shortfall.

Some are more equal than others

We should acknowledge here that the new pension freedoms are not universal. While they allow pension schemes to be more flexible, they are not compulsory for historical arrangements. Some schemes tie you into purchasing an annuity at retirement while others restrict the ways in which you can access your pension savings. And whilst government legislation allows these schemes to be more flexible, the schemes’ trustees are not obliged to offer you every option.

And, of course, if you’re in your company’s defined benefit scheme your pension will reflect your final salary at retirement.

Quick read: the differences between defined benefit and defined contribution pension schemes

Delay the day

Nevertheless, there could be ways to stretch your pension pot further. The first option may be the easiest or the hardest, depending on whether you like your job.

Deferring the point at which you draw an income from your pension savings keeps the money invested for longer. This gives it the potential for further growth whether you are planning to buy an annuity or choose another option to access money from it.

Delaying retirement is becoming increasingly common. The number of people still working in their seventies has more than doubled in the last decade with nearly half a million people now in full- or part-time employment. This is an increase of 135% since 2009 [5].

This isn’t necessarily people staying in their current positions, but includes those exploring new avenues, setting up small businesses, or taking on part time or consultancy roles. Talking to a financial adviser could help here. Combining part-time or consultancy work with taking a small amount of income from your pension could stretch its value.

Delaying your retirement date could really work in terms of increasing your potential pension. The new state pension alone increases every week it is deferred, as long as you defer taking it for at least nine weeks. Your state pension increases by the equivalent of 1% for every nine weeks you defer; or 5.8% a year. In pounds and pence, that’s an extra £9.74 a week on the full new state pension (currently £168.60 a week) [6]. A similar effect might be achieved for your corporate or private pensions depending on their terms and conditions.

Delaying your retirement date increases your state pension by 1% every nine weeks.

If you do decide to take an annuity, retiring later also potentially increases the amount of income you could be offered by the provider as the period over which it is to be paid reduces. However, the trend in annuity rates has been downwards since 2009 [1] and you could run the risk that they fall further.

Take a broader view

But what if you can’t wait to turn your back on the rat race? Another option could be to make the most of your other assets – ISAs or property, for example – and defer taking your pension that way. This can have inheritance tax advantages, too. Passing on a pension can be far more tax efficient than passing on other assets. It’s worth discussing this option with a financial adviser.

Complex flexibility

Today’s generation of retirees may need a larger pension pot, but they have greater flexibility in the way they use their pensions. They are no longer compelled to buy an annuity and for some, drawdown offers a means to keep their wealth invested in their pension, while generating income. However, it brings complexities and investors need to find the right balance for their circumstances.

Holding large amounts in cash may feel intuitively safe, but it isn’t likely to get you where you want to be. You need to structure your wealth so that your capital grows ahead of inflation or risk losing out in real terms.

The most recent Barclays Equity Gilt Study [7] shows that over the last decade British company shares have returned 5.8% a year, compared to 2.7% for bonds. Meanwhile, investors who have stuck to cash have seen the value of their savings fall by 2.5% due to the destructive power of inflation. Longer-term figures show a similar pattern [8]. However, it should also be borne in mind that investing comes with its own risks.

Our top tip: you need to take enough risk to meet your objectives, but not too much. And this is where a conversation with a financial adviser could help.

With any investment you should bear in mind that past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and is not guaranteed, and you might not get back your initial investment.

Caveat emptor

An unwelcome side-effect of the government’s move to liberate retirees from the need to buy an annuity has been the rise in pension fraud. A desire to get more from the money they’ve saved can blind people to the risks in ‘get rich quick’ retirement schemes.

Taking too much risk early in retirement or holding just a handful of stocks or high weightings in specific sectors – the retirement equivalent of having all your chips on red – could actually be more likely to erode your retirement wealth than enhance it.

It is also worth keeping an eye on the tax efficiency of your investments. Depending on the type of pension savings you have, you might be offered the option of taking all your pension pot in cash at retirement. If you do, you will find yourself paying tax on anything over and above the 25% tax-free allowance.

There are a number of other allowances such as the personal allowance, capital gains tax allowance, dividend and savings allowances.

A conversation with a financial adviser could help you structure your investments to make the most of these allowances.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.


Over the past 25 years, the amount of cash needed to generate an annuity income of £20,000 per year has increased by £309,000 as falling interest rates reduce the amount of annuity income your pension savings can buy.

Unfortunately things aren’t likely to change in the foreseeable future and we will all need to be cannier about the way we plan for our retirement. Talking to a financial adviser could help you develop a strategy for retirement income that takes into consideration many factors including those we have looked at in this article.

[1] MoneyFacts, based on a male aged 65 purchasing a standard level annuity without guarantee based on a £100,000 purchase price, 03 October 2019.
[2] Annual survey of hours and earnings, Office of National Statistics, 25 October 2018
[3] The New State Pension paid to eligible retires who have made 35 full years of National Insurance payments. Her Majesty’s Revenue and Customs as at 09 October 2019
[4] 27 September 2019
[7] 11 April 2019

Important information

Any views expressed are our in-house views as at the time of publishing.

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Fees and charges apply at Schroders Personal Wealth.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

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