Savers see with-profits pensions slashed by 87%: Thousands promised annual payments of £30,000 now set to receive just £3,700
- Retirees will get just £3,774 a year after 20 years of saving £200 a month
- Plunging investment returns and falling annuity rates leave a gaping hole
- Savers sold with-profit policies in the 1990s will receive just an eighth of what they were led to expect
Thousands of savers with old pension plans have had their retirement hopes dashed by a double whammy of crashing returns and the worst payout rates in history.
A Money Mail investigation has found savers who were sold with-profit policies in the Nineties will receive just an eighth of what they were led to expect.
Today's retirees will have to put up with a pension of just £3,774 a year after 20 years of saving £200 a month.
When they took out the policy, they were told they could expect nearer £29,000. That means their pensions will be an astonishing 87 per cent smaller than insurance salesmen estimated two decades ago.
Pensions scandal: A Money Mail investigation has found savers who were sold with-profit policies in the Nineties will receive just an eighth of what they were led to expect
They have been hit by a toxic combination of plunging investment returns, which have left a gaping hole in pension pots, and a fall in rates on annuities, which turn their savings into an income for life.
And to add to the misery for those still to retire, rates have started tumbling even more dramatically this month as the Bank of England prepares to cut the base rate again.
Patrick Connolly, of independent financial advisers Chase de Vere, says: 'Payout figures on with-profits pensions are shocking compared with original expectations.
'They keep falling almost regardless of the performance of the underlying funds. Savers will be far poorer in retirement than they originally thought.'
At the height of their sales in the mid-to late-Nineties, hundreds of thousands of savers relied on with-profits to provide them with a decent retirement.
The policies were often sold to those looking to build a retirement fund through a personal pension, usually when no company pension was on offer. This included millions of self-employed workers and small business owners.
Policyholders were told their money would grow with guaranteed annual bonuses.
The point of with-profits plans was that pension companies would put aside money from good years to smooth out the times when investments under-performed. As a result, bonuses could rise each year or at least stay the same.
But there has been a headlong fall in payouts after insurers cut annual bonuses having paid out too much in previous years.
In 1997, with-profit plans paid out an average £265,500, figures from respected trade magazine Money Management show.
Big players such as Standard Life paid out £269,365 and Legal & General £267,291. Figures are based on the industry standard of a man putting £200 a month into his pension for 20 years and retiring aged 65.
But by 2006 they had fallen to £105,361 at Standard Life and £121,316 at L&G.
And this year policyholders will see just £81,697 and £77,310 respectively. Prudential's figure has dropped from £130,906 ten years ago to £84,518 today.
The average across all major providers this year is £78,300 — around £187,200 less than expected. Typically, savers had to buy an annuity to turn this into an annual income that would last for life.
Salesmen boasted of the generous flow of cash savers would get in old age and used annuity rates at the time, which stood at 11.18 per cent, to advertise alluring average incomes of £29,683.
On a similar policy maturing now, someone saving exactly the same amount would see £3,774. Not only are they turning a smaller pot into an income, but annuity rates have more than halved to 4.82 per cent.
'This is the worst time in living memory to buy an annuity,' says Billy Burrows, an independent pension income expert.
Savers' choice of where to buy an annuity has also shrunk as competition in the market fades away. Five years ago, around 12 companies would accept their money.
Today, there are half as many. Prudential is the latest to leave and now offers annuities only to its own policyholders.
And rates are still falling. A 65-year-old can expect £4,820 on a £100,000 lump sum, down £290 from £5,110 last month before Britain decided to leave the EU.
Interest rates are a crucial benchmark for annuity prices.
So, if the Bank of England cuts the base rate to 0.25 per cent — which experts say could happen as soon as tomorrow — it could heap more pain on those near retirement.
Check with your pension provider whether your policy has a guaranteed annuity rate written into it.
In some cases, these are more than 10 per cent. But they are usually a 'single life' annuity, which means your pension dies with you. This may not suit your circumstances — for example, if your wife does not have a pension in her own right.
With the arrival of pension freedom last year, you have a choice of buying an annuity or setting up a so-called drawdown plan to provide an income. You can take as much or as little as you want — but you risk running out of money.
'You can do a combination of these,' says Billy Burrows. 'But to get it right you need advice, and that will come at a cost.'