Pensioner couples now take a quarter of their pension income from work in retirement, according to new data published this week by the Office for National Statistics (ONS).

In 2009, the average pensioner couple had a joint weekly income of £564, equivalent to £29,000 a year.  The general increase in income of retired households means that they are enjoying a better average pension income than in previous years, although research has shown that many continue to work out of financial necessity, and have sacrificed their dream of retirement, because their private pension savings have failed to deliver the lifestyle they had planned for, after work.

Pensioners now make up just 38% of the poorest fifth of all UK households, showing a marked improvement from the level of 56% in 1977.

The ONS has analysed the sources of pension income for retired couples, and found that while 25% comes from private pensions and company pensions, 35% came from state pensions , and 25% from earnings from continuing work.

At the lower end of the scale, however, the ONS has pointed out that over half of single pensioners receive less than £10,000 per year in total  pension income, and that the poorest 20% of pensioners get by on less than £197 per week.

In its previous-year data for 2008, the ONS showed that 31% of pensioners depended on the Basic State Pension and pension credits as their sole pension income.

EU statistics have recently shown that the UK basic state pension is the lowest state pension in Europe, at  just 30.8% of average working pay, compared with an EU average of 60%.

Sales of income drawdown plans have nearly doubled so far this year, as pension income from traditional annuities reaches a 15-year low, according to the Association of British Insurers.

Income drawdown, also known as an unsecured pension, provides a pensions income that is flexible, as you are not limited to taking the same pension income each month.

In an income drawdown arrangement, your pension savings remains invested in the stock market, and you may take out or ‘draw down’ an income as and when you wish. 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.

Another advantage of using income drawdown as a pension income strategy is that you remain the owner of your pensions savings, rather than handing them over to an insurer, by making an annuity purchase, right away upon retirement. This offers you the option to leave your pension savings to your family in your will, although a high tax levy of 55% is payable on savings bequeathed in this way.

Income drawdown is not without its risks, however, and those who deferred purchasing a pensions annuity in recent years have found that they may now be worse off because of it. Many have found that their stock market investment has not performed well and, in the meantime, they must also consider the loss of the pension income they would have had from a pensions annuity.

This reveals the growing pensions income challenge faced by future pensioners, at a time when longevity is increasing more quickly than ever before.

Today’s over 55s, for example, will live for an average of 88 years, typically retiring at 63 years and 6 months.

With an average of 44 years in work and a retirement lasting 25 years, each year of retirement is funded by just under two years of work. This is a difficult imbalance, considering how little most people save for their retirement planning every year, Aviva said.

As longevity increases, what has been termed the pension incomes ‘timebomb’ will place an unsustainable pressure on the individual person’s income from pensions.

The need for independent pensions advice to consider a personal pension, or one of the many other pension types, has never been more clear.

Demographic trends also indicate that the situation is likely to worsen in future.

Not only will people setting out on their working lives today live for longer, they are likely to start working later.

Even those who are able, in the future, to enjoy an early retirement at 60, could be retired for almost as long as they are working. This means that each year of retirement would need to be funded by just over a year of work.

The largest single source of income for the over 55s today is the government’s basic state pension and associated benefits (24%) followed by company pensions (16%) and wages (13%). However, as the Government has indicated that it will be looking more towards self-funding of retirement, and many companies close their generous final salary pension schemes, this does not bode well for future generations.

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.

Failing to predict the recent drop in pension income in their pension planning has trapped a third of pensionable workers, preventing them from retiring as planned, according to a report just published by Heartwood Wealth Management*.

The findings have led to a call for workers to begin their pension planning earlier, and treat pensions saving as ‘a 40-year engagement’.

Heartwood’s research revealed that nearly half of those aged 65 and over are planning to continue working until at least 70, but that most of those (29%) would prefer to be already retired, and are working because they cannot do without the money.

There are 3 main reasons why these over-65s believe they could not live on their current projected pension incomes:

- A third (32%) cited a fall in the value of their pension

- 27% blamed the higher cost of living

- 24% said they were still giving financial support to their children

- 8% were working to meet the rising costs of their medical care

“While the Government has chosen to position ending the Default Retirement Age as a victory for older people against age discrimination, the sad truth for many is that they’re not working through choice, but because they can’t afford to stop,” said Simon Lough, Chief Executive of Heartwood.

“While the current crop of working 70 year olds is still in the minority, this trend will rapidly spread through younger generations.

“ The only way to avoid being forced to continue working is to start saving earlier, and treat retirement planning as a 40 year engagement.”

Recent information from Moneyfacts showed that plunging annuity rates now give workers half the pension income they would have received from their pension savings 15 years ago.

*Survey for Heartwood by ICM of 450 adults aged 64+, July 2010

Almost 17 million working people (48% of workers) with a pension plan in place have never reviewed their pension plans, while only 21% have taken a pension planning review in the last year*.

Of those who have carried out a review of their pension planning, 38% opted for the default option offered to them by their lender, and 19% of these said that the explanation of how their funds would be invested was either poor, or not explained at all. Most alarmingly, 18% of people had made their allocation decisions on their own, acting without pension advice to decide how the funds in their pension plans would be invested.

A further 33% of those who had taken part in a review of their pension plans were unable to say whether or not they had simply chosen the default option offered to them.

Of those who admitted not knowing how their pension was invested, 1 in 5 were approaching retirement, aged 55 or above.

Given that some of the largest investment funds in the UK have underperformed, failing to meet their benchmarks for performance in each of the past 3 years, many pension savers who neglected their pension plans are likely to have lost out on potential pensions income they would have received, if their savings had been reinvested in better funds.

The research also explored who UK pension savers turn to for pension advice.

The largest group (33%) of those who did seek pension advice went to an independent financial adviser, while 10% indicated they turned to their bank manager.

One alarming fact to emerge from the report was that 13% of pension savers listen to unqualified advice on their pension plans, from a friend or family member. 

*Research for Baring by ICM Research, covering 1478 non-retired UK adults, July 2010

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’.

Latest government proposals to link private pension income to the Consumer Prices Index will increase the negative effects of inflation on pensions, says Mallowstreet, a leading panel of pension industry experts.

Previous proposals had been to link both state and personal pension incomes to the Retail Prices Index (RPI), which generally rises faster than the Consumer Prices Index (CPI) and therefore provides a better safeguard against inflation. In recent years, the CPI has generally risen 0.7% per year less than the RPI.

In the next 5 years the gap between the two indexes is expected to be higher, and 1.2%, according to calculations by the Office for Budget Responsibility.

The CPI link was first proposed for state pensions, but the Department for Work and Pensions has claimed that it is appropriate and consistent to take the same approach for private pensions. 

Because pensions are a long-term investment, the differences in the rates are magnified over time. Mallowstreet estimates that pension incomes linked to the CPI could be worth up to 25% less than pension incomes from private pensions linked to the RPI.

The Government now proposes to use the CPI as the index for linking increases in the basic state pension, state benefits, and large public sector pension schemes. This will lead to huge savings in the Government’s pension costs, it will considerably deplete pension savings and pension income from pension schemes.

Mallowstreet has now written to the government asking for a full consultation period, before the proposed changes go ahead.

The pensions income of a typical middle-class UK person with a private pension could have been based on pensions savings that would have been up to £100,000 larger, had these hidden charges not been taken over the years. The comments were made this week by David Pitt-Watson, a senior exective of Hermes Fund Managers, and a consultant to the BT pension, the country’s largest company pension fund.

Mr. Pitt-Watson said that if a typical British and a typical Dutch person save the same amount of money for a pension, the Dutch person will end up receiving up to 50% more in pension income upon retirement.

This, he said, was due to the more transparent and efficient architecture governing Dutch pensions savings. The likelihood of UK pension savings being whittled away by fees and levies was a particular problem in higher-cost personal pensions and was, therefore, most likely to represent a problem in pensions planning for middle to high earners.

As an example of how the fees in private pension schemes make a difference to pensions planning, Mr. Pitt-Watson used the scenario of a 25-year-old who starts with pensions savings of £1,000 per year, raising that by 3% a year as he goes to account for inflation.

Assuming a 6% annual return, that would result in  pension savings at age 65 of £248,170 providing pensions income for the next 20 years of £16,080 per annum.

However, if the same saver had kept their pensions savings in a scheme charging a fee of 1.5% a year, his pension income would be 60% lower, at only £9,900 a year.

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.