Five crucial pension facts

Updated on 29 October 2014 | 7 Comments

Read about these five crucial pension facts and your whole approach to retirement saving may change.

We write a lot about pensions at, but we’ve never mentioned some of the crucial facts I’m going to highlight today. They’re all well worth knowing about, so keep reading!

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1. The average pension pot is £25,000

When people are about to retire and they come to buy an annuity (a pension income for life), the average size of the pension pot is just £25,000. I stress the word ‘average.’ Obviously, some pension pots are much smaller. According to Legal & General, 34% of pension pots are worth less than £10,000.

Now I accept that some people with small pension pots may have other sources of retirement income apart from their annuity. For example, they might have a final salary pension from a job they had for a part of their career. And they’ll probably get the state pension too. In fact, if you have a good final salary pension, you don't need to have a pension pot and you don't need to worry about annuities.

But for many people, an annuity is supposed to be your main source of income in old age. And if your pension pot is only £25,000, you’re going to get a very small income. Most likely, somewhere around £1250 a year. 

2. Annuity rates are pathetically low

Many people still don’t realise how low annuity rates are these days. Imagine you’re a 65 year-old man who is about to retire with a £50,000 pension pot.  If you buy an annuity that will pay out the same amount every year for as long as you live, you’ll only get £3,300 a year.

This tip is absolutely vital to know if you want to make the most of your pension pot at retirement.

If you buy an annuity that rises in line with inflation, you’ll only get £2,028 a year!

3. People who buy annuities live longer

The average life expectancy for a 65 year-old man in the UK is 82, but if you’re a man who buys an annuity, you can expect to live longer. Insurers work on the basis that you’ll live till 90!

I guess this is because many annuity buyers have worked in white collar jobs and been ‘sensible’ for most of their lives.

And, in a way, it’s good news as it means many annuity buyers will have the opportunity to do lots of new things in a long retirement. But it also helps to explain why annuity rates are so low.....

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4. People who 'shop around' are more likely to buy an enhanced annuity

We’ve said before that it’s essential that you shop around when you buy an annuity. It can boost your income by as much as 20%. We’ve also urged readers to disclose all your medical conditions when you buy an annuity - then you can get an enhanced annuity that also pays out more.

One really interesting point is that if you’re savvy enough to shop around, you’ll be much more likely to be savvy enough to go for an enhanced annuity.

Let’s look first at the people who shopped around and didn’t buy their annuity from the company that managed their pension pot. According to Legal & General, 39% of this group bought an enhanced annuity.

But when you look at the people who stuck with their original pension provider, only 7% bought an enhanced annuity. So it looks like a fair chunk of folk have had a double disaster on the annuity front. They didn’t shop around, and they didn’t get an enhanced annuity even though they could have got one. I dread to think how much money some folk have lost. And don’t forget, once you’ve bought your annuity, you’re stuck with it. You can’t change your mind.

5. Employers may get keener on pensions

This might surprise you, but I reckon that employers may reverse the recent trend and become keener on providing pensions going forward. This is because we’re returning to the situation which led to the creation of pensions in the first place.

Employers first started paying pensions in the nineteenth century because it was the only way employers could get rid of elderly employees who were no longer up to the job. Now that the compulsory retirement age is set to end in October, employers may struggle to move some staff on. If an employer offers a decent pension, an employee is more likely to voluntarily pack it in when he/she reaches 65.

What’s the lesson?

So what can we learn from these facts? Although the last of these five facts is surprisingly positive, the overall picture is pretty gloomy.

Basically younger folk should save more and start earlier. Easier said than done, I know, but it’s the only realistic solution. If you want help sorting out your pension, you might benefit from a consultation with a good financial planner or adviser. Whatever you do, don’t ignore this issue and do nothing. You’ll regret it.....

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