Enhanced annuities often provide a higher pension income from the pension savings of those whose lifestyle choices or medical history make it likely that they will not live as long as healthier annuities purchasers. Enhanced annuities are structured to provide a higher payout, as it is likely that they will not have to pay for as long, based on the reduced life expectancy of the annuitant.

Enhanced annuities are particularly associated with smokers, and those with high blood pressure or high cholesterol. This type of pensions annuity is usually allocated on the basis of a points system, with no medical examination required. However, with some companies the points system means that enhanced annuities are more usually offered to those with 2 or more of the conditions mentioned above.

Annuities provider Towers Watson noted sales of enhanced annuities totalling £582m in the first quarter of 201o, a new quarterly record which was then smashed by even better record sales of £676m in the second quarter.

Towers Watson also indicated that enhanced annuities, which were introduced in 1995, now account for a third of all annuities sold in the UK.

Over two-fifths of larger companies in the UK are looking at ways of reducing the cost of their company pension schemes, in a move which could adversely affect pension provision and pension income for employees.

The news reflects a general trend towards reduced commitment to company pension schemes throughout the private sector, and underlines the need for employees to seek quality pension advice on their retirement planning and projected pension income.

The Association of Consulting Actuaries has interviewed top executives at over 200 employers with company pension schemes, and found that 41% of them believe they are ‘highly likely’ to cut the cost of their company pension scheme, after the launch of the National Employment Savings Trust (NEST) from 2012.

NEST is the government-backed initiative to make company pension schemes widely available through all companies, and under current proposals will be gradually introduced on a phased basis from 2012-2017.

While there are suggestions that the scope of the NEST scheme may yet be modified ahead of the 2012 launch date, several elements in the plan, as it stands at the moment, are a source of concern for employers.

All employees are to be ‘auto-enrolled’ into the company pension schemes that must be put in place to meet the requirements of the NEST. Only after auto-enrolment can those who do not wish to contribute to the company pension scheme leave it, by actively ‘opting out ‘ of NEST. This strategy is designed to combat the tendency of individual employees towards ‘pensions inertia’ by forcing them to opt out, rather than opt in, to their company pension scheme.

For UK companies with a company pension scheme already in place, pensions uptake is on average 55%, and is predicted to reach over 80% after the auto-enrolment process. This will impose significant additional administrative costs on all company pension schemes.

The Association of Consulting Actuaries also found significant opposition to several other requirements with the NEST scheme. Their results revealed that 64% would like the removal of rules on employees who opt out, requiring that they be re-enrolled every 3 years.

Furthermore, 75% of employers oppose the requirement that employees with less than 3 months’ service should also be auto-enrolled. This would force the enrolment from day one of new employees, who may be in a probationary period with the company, and would also force companies who use short-term seasonal workers to include them immediately in their company pension scheme.

The changes will be part of modifications to the ‘age 75 rule’, which had required pension savers to purchase a pensions annuity by that age. Savers will now be free to leave their pension funds invested in the stock market, taking (or ‘drawing down’) an income that can vary each month. Income drawdown is, therefore, well-suited to those whose monthly need for pension income may vary, for instance if they continue in part-time work.

Details of specific figures for the drawdown limits have not yet been revealed.

ASPs, which provide a similar arrangement of income drawdown within set limits, will now be abolished, and ASP holders will be automatically switched into capped drawdown after April 2011.

Government emphasises that income drawdown within set limits is a way of giving pension savers greater flexibility. However, the annual cap is also designed to help ensure that their pensions income will last longer, and reduce their potential reliance on pension income from the state. The UK was recently highlighted as having one of the lowest and most meagre state pensions in the EU.

The flexible drawdown arrangement (different to the capped drawdown) will allow access to unlimited lump sums, subject to a minimum income requirement (MIR).

Advantages of pension income by income drawdown

The advantage of income drawdown is that you retain possession of your pension savings, rather than handing them over to an insurance company to purchase a pensions annuity.

Whereas funds transferred from an ASP to the holder’s dependents upon his death were previously subject to charges totalling 82% of the funds, the government now proposes that this be replaced with a new 55% ‘death charge’.

Projected pension income for private savers continued in freefall during July 2010, according to new data by pensions consultancy Aon Corporation. The latest projections underline the need for ongoing pension reviews and financial advice, Aon said.

Aon’s  monthly DC Pension Index checks the value of pension income at age 65, from private pensions, for individuals in three separate pension savings scenarios. Aon projects pensions income from contributions equalling 10% of a £25,000 salary into a defined contribution pension scheme for a 30-year-old, a 60 year old and a 65 year old. This is based on the 30 year old having a pension pot today of £15,000, while the savers at 60 and 65 have pots of £150,000.

During July, the projected annual pension income at age 65 for the 30-year-old  fell by £518, from £19,863 to £19,344.

The projected pension income for the 60-year-old retiring 5 years from now has been modified downwards by a further £358, from £10,824 to £10,466. Income for the 60-year-old had already fallen by £3,000 since 2008, Aon stated in a previous report.

The projected pensions income for the 65-year-old dwindled by £259, from £7,925 to just £7,666 per year during July.

Aon points out that this level of income is less than half the recent estimates of £14,400 for an adequate standard of living, calculated by the Joseph Rowntree Foundation*.

In the light of the general downward trend in projected pensions savings and pension income, for both younger savers and those approaching retirement, Aon has stressed the ongoing need for those making  pension savings to take pension advice in regular pension reviews with their financial adviser.

“Individual pension investors should keep a watchful eye on their pension pots to ensure their retirement plans are on track, and make suitable provision for their future,” said Aon.

*(Read article Pensions income from state inadequate for modern living)

Government’s announcement this week that the retirement age of 65 is to be scrapped in October 2011 has given workers the freedom to plan to work beyond 65, for the first time. With no default retirement age, employers have lost the right to require an employee to retire, simply by giving them 6 months’ notice before they reach their 65th birthday.

HSBC questioned over 2,000 UK adults over 50 and found that most would intend working beyond 65, not as a lifestyle choice, but simply through the anticipated need to earn extra cash in retirement.

Recent information in a separate survey from Prudential showed that over half (59%) of UK adults have realised they have not saved enough for their retirement, and believe they will outlive their pension savings.

The Office for National Statistics (ONS) calculated that currently 1.45m people over 65 are still in full-time employment, which means that 12 per cent of ‘retired’ people are actually still in a full-time job. The figure has risen by 84,000 in the past year.

HSBC also believes, however, that many are considering a longer working life as an opportunity to seek out new challenges. David Wells, HSBC’s head of pensions, believes that those now rethinking their pension planning in order to work longer are seeking ways to embrace new skills and challenges that may now only become possible after careful financial planning during their earlier working life.

Making a detailed pension plan to secure a pension income from company or private pensions is best done with quality pension advice, Wells added, and in future is as likely to factor in a working old age, rather than a traditional leisure-based retirement.

Many of those buying pensions annuities to turn their pension savings into a regular income could have increased their pensions income for life by up to 20%. Pensioners in less than perfect health, who would be eligible to buy an enhanced annuity, could be missing out on as much as 30% of their potential pension income, by not seeking advice.

Specialist pensions law firm Sackers has pointed out that anyone who was not made aware of their right to shop around for their pension annuity – which is known as their ‘open market option’ (OMO) – could now be eligible to make a legal claim for compensation from pensions providers or the trustees of pension schemes.

There is an obligation on pension companies to inform customers of their open market option, as they approach retirement age. However, a report by the Financial Services Authority found that nearly 40% of pensions providers fail to make it clear enough to customers of their right to shop around. As a result, many of those retiring take the first pensions annuity offered to them, which can be an inferior annuity from their pensions provider.

A spokesman for Sackers said that while pension scheme trustees are not obliged to offer members financial advice themselves, they should advise members to get independent, unbiased financial advice elsewhere. Where they do not, and the member suffers a loss of pensions income as a result, there could be a case to answer, the company said.

Today the Chancellor George Osborne has announced that ex-Labour cabinet minister John Hutton has agreed to head up the commission which will look at budget changes to public sector pensions, and to formulate a series of budget changes to be implemented in next year’s budget, in June 2011.

Public sector pensions are final salary pensions which have a guaranteed minimum pension income, as they are linked to the final salary of employees when they retire, and to their number of years of service.

The largest government pension schemes are not invested, but depend on this year’s contributions from existing members to fund the pensions of retired members. The four largest such schemes are the NHS pension scheme, the defence forces pension scheme, and the teachers’ pension scheme. Together these had payment obligations in 2008/09 of £19.3bn, while contributions totalled just £4.4bn, according to the National Audit Office.

The generosity of public sector pensions becomes clear from the figures. Private sector savers in defined contribution pensions save on average less than £50,000 during their working life. However, they would need pension savings of £189,000 to equal the average civil service pensions income of £5,928 per year. They would need a pension pot of over £221,000 to achieve the average NHS pension income of £6,931 per year. Most generous of all: to have the average teachers’ pension income of £9,358 per year, you would need a pension pot of over £298,000.

*Data from Office for Budget Responsibility, June 2o1o

However, only 6% of private companies are intending to keep their final salary schemes open, intending instead to replace them with cheaper defined contribution schemes. In order to encourage existing employees to make the move from final salary to defined contribution schemes, 53% of companies are planning to offer enhanced transfer values, while 8% of companies have already done so*, PWC said.

The pension income challenge for private sector workers becomes clear, if you compare what they would have to save over their working life, to achieve the pension income of public sector and civil service workers. Bearing in mind that the vast majority of savers in company pension schemes accumulate a pension pot of less than £50,000, the differences are compelling.

For example, you would need total pension savings of over £189,000 to achieve the average civil service pensions income of £5,928 per year.

You would need a pension pot of over £221,000 to achieve the average NHS pension income of £6,931 per year.

You would need a pension pot of over £298,000 to have the average teachers’ pension income of £9,358 per year.

The pension planning challenge will intensify in future, as more companies close entry to their relatively generous final salary pension schemes, and switch new employees into less dependable defined contribution schemes instead.

Future accrual of defined benefits pension income has already been closed by 32% of UK companies, and a further 30% have declared their intention to do so in future.

In a final salary scheme, pension income is at a guaranteed level related to your salary at retirement. In a defined contribution scheme, there is no guarantee and pensions income is at the mercy of stock market and investment performance. This relieves the employer or government of any obligation to stump up the shortfall, if pensions income cannot be funded by investment returns in time of a stock market slump.

The gradual reduction in both public and private sector commitment to sustaining current levels of pensions income for employees is reflected in the fact that 87% of companies do not believe their employees will have enough saved to provide themselves with an adequate pension income. Employees are becoming aware of their need for professional assistance with their pension planning, especially as the June 2010 budget and other government cuts are likely to make the pensions environment more hostile still, in the coming years.

*Source: PWC survey of 179 major employers

“Money doesn’t buy happiness - money just buys off unhappiness.” The line, from the opening scene of Hitchcock’s ‘Psycho’, may be the closest the great man came to hinting that a financial plan can improve the quality of your life.

His words have now been echoed in the ‘Feel-Good Insight Study’, produced by Aviva with the help of leading psychologist Dr Malcolm Cross from City University London. The study concludes that working with financial planners to set up a goal-oriented financial plan can largely eliminate money worries, making you happier overall.

The study found that 68% of those with high self-esteem have a financial plan, and 62% have set themselves clear financial goals for the long term. Looking at people with low self-esteem, on the other hand, three-quarters have no financial plan for the long term. Due to this failure to take financial planning advice, 69% of those with low self-esteem are plagued by money worries on a daily basis.

Happiness tends to be linked more to a feeling of financial control, rather than to a level of wealth, Aviva found. More people earning over £50,000 have low self-esteem than high self-esteem, but 85% of those with high self-esteem also felt in control of their financial plan.

There was a clear correlation between happiness and taking financial planning advice, or online financial planning advice. Simple steps such as working with financial planners to work out a structured financial plan, or sort out writing a will, give a concrete sense of financial control which translates into happiness in real terms.

For those without a financial plan, the indicators are generally less positive in terms of personal contentment. While most people (86%)  worry about money at some point, 1 in 3 (34%) worry about their finances every day and 2% claimed they worry about money ‘every minute of the day’.

Half of all women (52%) feel overwhelmed by the amount of financial information they see, highlighting their need for financial planning advice or guidance from financial planners. Five per cent of UK adults ‘don’t have any understanding’ of financial products, Aviva said, which rises to 16% for those in the ‘low self-esteem’ group.

Nearly a third of people (30%) with a pension believe they need further financial planning advice, to put the right pension provision in place.

In terms of personal debt, a quarter (25%) of people with a credit card do not know how much they owe, and feel out of control of their debt, again indicating they would benefit greatly from financial planning advice and the creation of a well-built financial plan.

No matter how good your financial plan, however, a stay at the Bates Motel is not recommended.

New findings by Standard Life* show that 32% of pension savers admit they do not know how their pension is invested.

One in ten (10%) have indicated that they have never checked their pension plans since the day they were set up, despite the fact that the underlying investments in private pension schemes and company pension schemes will largely dictate their income from their pension plans in retirement. As funds performances will vary over time (only a third of actively managed investment funds will outperform their index in any given year, for instance) regular monitoring of pension plans based on a minimum of one annual review are generally regarded as essential, to keep your retirement planning on course.

Nearly a quarter of those polled by Standard Life (23%) admitted that they ‘don’t care’ about their pension plans. Standard Life’s definition of ‘don’t care’ applied to those who voted 1,2 or 3 on a scale ranging from “1 – do not care at all’ about their pension, up to “5 – care a great deal”. Standard Life therefore defined ‘caring about’ pension plans as monitoring them regularly, reviewing different options, and keeping an eye on markets.

Those with smaller pension plans may be particularly prone to pensions indifference, with 53% declaring they would have to have to have £10,000 invested in any savings or pension plans, before they would seek financial advice.

“It’s shocking that a pension has to be eight times the value of jewellery, before most consumers care about it,” said a Standard Life spokesman.

*Standard Life / YouGov survey of 2030 UK adults, May 2010

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