'Unacustomed as I am to public speaking....'

There is nothing quite so cringe worthy as the office retirement speech. Forced to stand in front of your peers, clutching a bunch of flowers and an Elizabeth Duke carriage clock, expressing your heartfelt sorrow at the thought of not seeing them again. All this before skipping out the door to a life of carpet bowls, Werther’s Originals and an unhealthy obsession in those weird products advertised in the back of the Sunday Mail magazine that you always wondered who on earth bought.

Unfortunately, for many people who intended to retire about now, a few spanners have been thrown in the financial works. Firstly, unless they moved their pension funds into deposit investments prior to the downturn, the value of their pension fund is likely to have fallen. This means that they have less of a pot than they perhaps expected. The second whammy is that the said pension pot will provide them less of a pound-for-pound income now, than at pretty much any other point in history.

To understand why, we need to know how pensions produce an income. When retirement looms, at least 75% of the fund that has been accrued, is used to purchase an annuity. The basic principle of such things is that you give a lump sum to an annuity provider and in return they will guarantee you a fixed regular income until the day you die.

They will very much hope that you are hit by a bus on the way home, as they get to keep the money you gave them. Conversely, you hope that you live longer than Bruce Forsyth and bleed them dry.

Annuity providers work on the same principle as bookmakers. In order to calculate how much income they will pay you, they first need to work out when you are going to die, and they are uncannily good at it.

Your ‘death date’ is based on your postcode, gender and lifestyle habits. If you reside in Dorset then the life expectancy for a male is aged 80. If however you were brought up in the shadow of ICI on fried bread and dripping, then it is aged 74. If that concerns you, (especially if you happen to be 73) then think yourself lucky you don’t live in Glasgow where it is age 68. To put that in perspective, life expectancy in Iraq is currently 67.

Lifestyle habits have a dramatic affect on the annuity rate also. The poorer the health, the higher the income. Smoking, drinking and obesity are all good when it comes to getting a higher annuity rate. Admittedly the trade off is that you are going to die much younger, which can be disappointing, but think how much more you will have to spend in the meantime.

Also life expectancy doesn’t care much for the niceties of equal opportunities. Hence men die on average five years before women and in turn they get a more attractive annuity rate for their trouble.

All of these issues affect the rate that you will receive, but the overriding factor is interest rates. This is because the annuity provider invests the money in order to provide you with your income, and the greater return that they can get, the greater amount they can pay you.

In this era of low interest rates, annuity rates are also punishingly modest and given that once purchased an annuity cannot be changed, those that need to buy one now can be locking in a bad deal until their dying day.

So what options are there? The most obvious is to defer taking an annuity and carry on working, assuming you didn’t burn any bridges during your retirement speech and Argos will give your colleagues a refund on the clock. If and when interest rates and fund values rise, then the figures may look more attractive.

There is one sure-fire way of increasing your pension income and that is to shop around for the best annuity rates as you are not obliged to take the one offered by your pension provider. In fact you are positively encouraged not to do so as it is likely to be very poor value when compared to the open market.

Other options are…. well none really unless you fancy moving to Glasgow and starting on the Capstan Full Strength.

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