Headstart: Pensions - Middle England's annuity trap.

In 1990, a 65-year-old man with a pension fund of £100,000 would have received a guaranteed pension of £15,500. Today he would receive only £9,500.

Life expectancy has increased, stretching available funds even further.

Conventional annuities are considered poor value therefore and it had been hoped the government would address this issue in the recent Budget.

At present, anyone with a personal pension fund is forced to purchase an annuity at age 75, which means the capital is no longer in their control.

On their death, their spouse receives a set annuity (usually around 50% of the original pension) which ceases on their death and cannot be passed to a younger generation.

Those in occupational schemes suffer the same way, although the age at which the annuity has to be purchased is often even earlier, making matters worse. For those in income drawdown who have decided to keep their capital and draw off an annual payment, passing the remaining funds to their surviving spouse or to their estate – provided they die before the age of 75 – it is even more frustrating as they have made a decision to be responsible for their own retirement arrangements. Sadly, there is at least one known case of suicide where a man decided his wife and children would be better of if he died before his 75th birthday.

It had therefore been hoped that the chancellor would either increase the age at which people have to take an annuity from their pension fund to 85 or at the very least, 80, or would allow the fund to be used to provide a set level of guaranteed income annually (an annuity) while leaving the remaining fund in the hands of the owner.

This was therefore probably the most disappointing area of the Budget for the vast number of people with both company and personal pensions who will take their retirement benefits in the years to come.

The government simply said the industry should adapt its products to suit the annuity rate changes and that people should exercise their open market option. There are some changes to products that could be considered, such as those introduced through unit linked and with profit annuities, but these do not and cannot address the real problems of falling annuity rates. While the government continues to pay off its debts, the yields from gilts will remain low and annuity rates will not improve.

Exercising the open market option can improve the annuity received simply by taking the fund to the market for the best rate – but again, if rates are low, the best rate is still not exciting. But a tiny flicker of light may be in sight as it is believed the government felt it could not introduce the ending of the minimum funding requirement at the same time as altering the age at which annuities have to be taken.

Perhaps the chancellor might just consider a reform next time around? ?: