Last week it was announced that supermarket giant Tesco is to enter the annuity market by offering a comparison service for those who are shopping around for the best deal. The company will not however be offering their own annuity products but instead will be offering rates from providers which will be powered by their existing comparison site Tescocompare.com. With nearly half a million annuities purchased last year there is certainly a huge market up for grabs, not least because more than half of these purchases were from the company with which the individual had been saving their existing pension. Using the open market option and comparing rates can boost an annuity offer by up to 40% or more depending on the individual circumstances, with the average increment being about 20%. Despite the rewards on offer from using the open market it is still grossly underused, with pensioners collectively missing out on millions of pounds worth of potential income. This move from Tesco will certainly be taking annuity shopping to the masses and it will be interesting to see what impact it has on the OMO figures for the next 12 months. The announcement follows the launch of an enhanced online annuity finder from Bristol-based IFA Hargreaves Lansdown.

Reaction to Tesco’s announcement has been mixed. Some industry observers believe it will help raise awareness of the need to compare rates when purchasing an annuity. Tom McPhail from Hargeaves Lansdown described the lauch as ‘great news‘ adding that…”…the more high profile participants there are in the shopping around market, the more likely it is that this will happen.” He also disclosed that the Pension Incomes Choice Association was to create a special shopping around intermediaries director in anticipation of more services like these being launched. However some advisers are concerned that merely focussing on a rate comparison could mean retirees ignore the need to get financial advice over the various options open to them at retirement. Patrick Connolly from AWD Chase de Vere told Money Marketing that…”…the problem is people may end up taking an annuity when it is not the best option for them. They may not be aware that a joint annuity or an enhanced annuity is the best option for them.” Harry Katz from Norwest Consultants argues that Tesco should be putting an upper limit on the pots they will deal as wealthier retirees would be better served getting actual advice on how to get best retirement income. Clearly the launch has divided opinion but it does come from a starting position of hundreds of thousands of retirees not getting the maximum income possible when buying their annuity.

A new report published by the Department for Work and Pensions has calculated a future labour shortage of 6.5 million jobs and that older workers will be needed to fill the gap. According to the DWP’s figures, over the next ten years employers will need to recruit for 13.5 million vacancies. However they also estimate that there will only be 7 million youngsters leaving school, college or University over the same period, leaving the aforementioned shortfall in workers. The data may come as a surprise to many given current high level of unemployment and in particular, the high level of youth unemployment. In fact rather than employers keeping older workers in work, some have speculated as to whether as a nation we should be encouraging older workers to retire, so as to provide opportunities for younger workers to get on the employment ladder. However, if the DWP figures are to be taken at face value, this would appear to be entirely the wrong strategy, notwithstanding any moral or ethical arguments about forcing people to retire. In fact the DWP themselves state in a report that retiring older workers ‘has no positive effect on youth unemployment‘.

Of course a cynic might argue that these figures are merely being used as a tactic to encourage employers to keep hold of older workers, something which the government would of course be hugely in favour of. The longer people work, the longer they pay taxes and NI for and the less they take out in state pension benefits. One could also question how a government could possibly know how many job vacancies there will be over the next decade without the use of a crystal ball. Whatever the motives the aim of keeping older workers employed  is something that should be welcomed. Older workers have a huge amount to offer in terms mentoring other staff with their work and life experience. The DWP research also found that older workers were as productive as younger workers, up until they were at least 70. Moreover removing a retiring worker and employing a young person with little or no experience isn’t something that makes sense for many employers, except perhaps in crude financial terms. Perhaps it may make sense for some unskilled jobs but for the majority of employers it just doesn’t.

The gap between the average male and female retirement income is widening according to a recently published survey. Conducted on behalf of the insurer Prudential, the Class of 2013 survey asked 8600 individuals about their preparations for retirement. The survey found that the gap in retirement incomes between men and women had widened by 13% compared with the 2012 figures. Looking at the data in detail, the average female retirement income was recorded at £11,750 a year, compared to an average male income of £18,250. The survey also found that the gap in retirement income varied by location, with the East of the country allegedly having the largest average gap of £10,300. Unsurprisingly perhaps, the data also found that only a minority of women (42%) feel prepared for retirement.

A further finding concerned the expected level of retirement income for both genders which has fallen from £18,300 in 2008 to just £15,300 this year. The below graphic shows how retirement income  expectation also varies by location…

March had been an unusually positive month for those about to retire with the news that annuity rates were on the rise. According to the Annuity Bureau, a 60 year old male purchasing a level (Aviva) annuity using a £100k fund would this month be £154 a year better off compared to last month. There was also reasons to be cheerful for those wishing to purchase an inflation-linked annuity as the leading provider L&G also announced it was increasing it rates, offering £78 more to the same 60 y/o male with a £100k pot. But it was smokers who could potentially benefit the most with the news that enhanced specialists Just Retirement had increased their annual income offer for a 60 year old male to £5,937. This is a whole 10 percent higher than the same person would have achieved had they annuitised in January. Given that we have witnessed an unprecedented trend of rates falling over the past three years, these rate rises will come as welcome reprieve to those over 50′s being squeezed by the wider economic downturn.

The good news didn’t last long however as it was confirmed on budget day that ANOTHER bout of QE is could be on the horizon. The Chancellor has indicated that the Bank of England’s asset purchase programme would remain in place for the next financial year. Secondly it was also revealed that the last MPC meeting saw three members (including the governor himself) voted to increase the amount set aside for QE from £375bn to £400bn. In addition to this extra money being set aside, the Chancellor also signalled that he wanted the Bank to take a more active role in helping to revive the economy, which gives a tacit green light for new Governor Mark Carney to indulge in another round of money printing. The Chancellor has repeatedly warned of the damaging impact a rise in interest rates would cause and thus is doing everything within his power to keep rates at their current record low level of 0.5%. However more QE is likely to dash hopes of a further rise in annuity rates as it will once again put upward pressure on UK government bonds prices.

As well as QE, there is also another reason why rates have been falling. According to Investors Chronicle, gilt prices are also being inflated by large FTSE 100 pension funds who are ‘hoarding’ gilts due the uncertainty in the market and fear of investing in more riskier options, such as equities. Ironically it is the actions of these companies who by sticking with gilts due to their own final salary pension liabilities are harming the retirement income of those saving into DC pension fund.

All this leaves those without a final salary pension who are coming up to retirement facing some unenviable, stark choices. Pensions expert Tom McPhail advises those who can afford not to purchase an annuity now and instead hold on to see if the market improves (although given there is more QE in the offing this could be a long while indeed). That said, rates did jump 3% this month. Aside from waiting to see if rates improve there is also the option to annuitise part of your pension fund whilst investing the rest in a drawdown scheme or perhaps instead to purchase an investment backed annuity. However not all retirees will be happy to incur risk when it comes to retirement income but with rates remaining stubbornly low and the government raising the GAD withdrawal limits back to 120% it seems this will become more commonplace in the future.

We all know that getting the maximum income from an annuity is vital given the recent slump in rates. Today we look at what kind of annuity income American cartoon legend Homer Simpson could expect to get.

Age

To approximate what kind of income level Homer could receive we first need to find out how old he is. Although his actual age is disputed, some fans say as he was 39 when the show was first broadcast in 1989, meaning he would be aged around 63 now.

Pension Fund

So now we know his age, the next piece of information we need to know is just how much money would be in Homer’s retirement fund? Well as fans will no doubt know he works at the Springfield Nuclear Plant. Now we all know from his mishaps and misdemeanours than Homer is not the sharpest tool in the box, so lets assume he works at the entry level. According to this article, an entry level engineer at a nuclear power plant can expect on average to earn around $56,587 per annum. Lets assume he has worked there since he was 21, but started on $17,000 and got a 3% payrise each year, meaning his lifetime earnings would total $1,394,394. And lets also assume he saved 5% of this into the company pension scheme who also added 5% on his behalf, thus giving a total fund of $139,439 converted into a GBP amount of £92,625…not bad at all!

Enhancements!

Despite a healthy pension fund value close to £100k, Homer would still only be looking at an annual income of around £3,656 were he to buy a standard annuity. However it is likely that Homer would be eligible for enhancements, given that he does no exercise and drinks gallons of Duff beer down at Mo’s Tavern. Surely he would have existing medical conditions which could enable him to get a better rate? It is stated in this article that to qualify for an enhanced annuity from Just Retirement, an individual would need to consume 40 or more units per week. The good news for Homer is that one pint of Duff contains 2.7 units of alcohol and considering he is swigging it back like there is no tomorrow he should easily qualify. On top of all that beer is Homer’s unhealthy diet of burgers, pizzas, fries, and more notably, donuts. He weight is estimated to be anywhere between 239lb and 315lb or 17 and 22 and a half stone with his height estimated to be 6ft. Taking the top estimate of 315lbs, this would give him a whopping BMI score of 42.7 – morbidly obese! The good news is this BMI score, along with his drinking habit would probably boost his income by at least 40%, taking his annuity income to well over 5,200 per year.

What about Marge?

If Homer is sensible then he will think about leaving an income for Marge should he pass away first, and, looking at his state of health, this is the most likely outcome. However a joint life annuity would mean Homer’s starting income would drop, depending of course on what percentage of income he wanted Marge to receive after he passes away. Would Homer be savvy enough to think about a widows pensions or would he go for the maximum starting amount offered to him? I think we all know the answer!

New data produced by asset management group Fidelity Worldwide Investment has found that the gap between the top and bottom standard annuity rates has shrunk from 20% to 8% over the last 12 months. However, in spite of the fact that the gap has decreased significantly, the company still warn of the absolute necessity to shop around when purchasing an annuity, arguing that retirees can still in some cases increase their income by as much as 40%. This additional income is given to those retirees who qualify for enhancement on their annuity due to their current state of health and/or any ‘lifestyle choices’ (such as drinking or smoking). However, even if you are fit and healthy there still exists a sizeable gap between the most competitive and least competitive providers. For example, the highest income for a 65 yr old man buying a standard annuity with £100k fund is £5,427.48. The bottom rate however would only equate to just £4,989.48, a gap of £438 per year in income. However 12 months ago the same person could expect £5,020 at the top end and just £4,013 at the bottom, a wider gap of £1,007.

Julian Webb from Fidelity Worldwide Investment commented that the shortening of the gap was likely to be down to some providers exiting the market in conjunction with the ban on gender based pricing. However, despite the fact that price differentiation for standard annuities was getting smaller he said that using OMO was ‘as important now as it ever was‘. Showing just how important that shopping around process is, the company uncovered a huge differential between the best and worst male enhanced rate for a 65 year old smoker, who could lose close to £2,000 a year by not selecting the top provider. Worse still if the person were to live for another 25 years past retirement age the total amount of lost income is nearly £50k, ouch!

The news that the gap in standard rates has shortened comes on the eve of the implementation of the ABI’s Retirement Choices Code of Conduct which aims to provide greater detail and transparency to those approaching retirement. Speaking at the launch of the code, ABI chief Otto Thoresen said it would give more people the confidence to make the right choices at retirement.  However the code has attracted some criticism from industry experts such as Annuity Direct’s Alan Higham who said that…”… the information that consumers will be sent under the code is superfluous, confusing and unhelpful. I suspect it will also drive more consumers to transact with their current provider.” Whatever the outcomes of the new code are the stakes couldn’t be much higher for retirees given that rates themselves have fallen dramatically over the past three years. Moreover in the future more and more people will be buying annuities due to the introduction of auto enrolment pension schemes which launched in October of last year.

Here is some interesting data from MGM Advantage regarding the impact inflation can have on people’s incomes, and in particular, retirement incomes. We all know high inflation is the enemy of retirees because it simply erodes the spending power of those who are often on fixed incomes. This means retirees get progressively poorer as they go through their retirement, when in actual fact their financial demands are likely to become greater the older they are. According to MGM, 90% of all annuities purchased are level, which means the vast majority of retirees who take out these products are all potentially exposed to the impact of inflation.

If we look at the table the company have produced, we can see that even with inflation at 3%, over five years the real terms value of £10,000 is reduced more than 11% to just £8,852. Moreover, if inflation were to remain at 5% for the same period then that £10,000 would be reduced in real terms even more to just £8,145, a drop of 18.5%. Of course the Bank of England has a CPI inflation target of well below this figure, just 2%. However we have not seen the Bank achieve this target since November 2009 when the inflation rate stood at 1.9%. In fact since that time inflation has increased substantially, particularly throughout 2011 when it did not fall below 4% and in some months rose as high as 5.2%.

Of course inflation is bad for consumers but doubly bad for retired folk, which is why those choosing their pension should really consider the impact of inflation when buying a product. As MGM’s Aston Goodey notes there is now ‘strong demand’ for retirement income solutions which take into account the impact of inflation. The problem for many is that mitigating against the impact of inflation when purchasing an annuity costs money in terms of a lower starting income. Naturally people are attracted to the option which offers the highest starting income, normally a level, single life annuity which is made even more apparent given that rates have fallen so low. The other issue is that many retirees as we know do not get the correct advice and are not forewarned about the danger of rising inflation on their retirement income. They blindly accept the first offer put in front of them which more often than not does not have any means of safeguarding against future rises in inflation.

If you are wise enough to be considering the impact of inflation there are a number of ways to mitigate against the erosion of your future spending power by building in escalations. These escalations can either be linked to inflation itself (know as an inflation-linked or RPI annuity) or alternatively can be determined by an individual on purchase. If you choose to peg your increments to inflation your starting level of income will be lower, in some cases as much as 40% lower. Some experts believe inflation linked annuities can be risky because in order to benefit you may need to live longer than the average retirement span and at the same time hope that inflation remains high throughout your retirement. Some argue it is safer to build in pre-determined escalations such as 1%, 2% or 3% etc. Of course even at 2% your spending income would not have kept pace with inflation over the past three years. Just in the last 12 months alone, in order to keep up with price rises each household needs another £678 according to the MGM analysis. Over 10 or 20 years the gap is even wider, which is why it is prudent not only to think about what you need for today but also for the future.

Remember also

The impact of last years gender equalisation for insurance products appears to have impacted directly on the competitiveness of some annuity rates. According to a recent report in the FTadviser, male rates have fallen both for standard and for enhanced annuities. Looking at the data they cite from money facts you can see just how far the top five best rate average has fallen for both men and women. What is evident is that rate falls in the enhanced market are far worse compared to the conventional market. Whilst the average fall in the top five standard rates for a 60 year old man (without guarantee) was just 0.4%, when looking at the same scenario for enhanced rates you can see the fall is much more dramatic at 6.8%. When looking at women’s rates, those buying a annuity with enhancements will also be worse off compared to the end last year, with the average top rate for a 60 year old woman (without guarantee) falling 2.1%. In fact, according to the best buy table the only group to experience an increase in rates are 60 year old women taking a standard annuity, which saw an average increase of 2.8% (without a guarantee). The largest single drop recorded was 8.1%, which applies to 65-year old men taking an enhanced annuity (without a guarantee). This equates to a fall in annual income of £50, based on a illustrative fund size of £10,000.

On top of the impact of the gender directive, there could be more bad news on the horizon as it was also reported today that rates could take another battering ahead of the next round of Solvency II legislation, known as the ‘Long Term Guarantee Assessment’. This process looks at the approaches taken by insurers to see how well they organise and plan their reserves, but could end up forcing insurers to hold more capital on their balance sheets. This in turn could force up the price of annuities as there will be less capital available. According to corporate accountants Delliote, rates as a consequence could fall by anywhere between 5 and 20 percent. However, some experts believe that providers may have already mitigated and made adjustments for Solvency II already in the latest round of rate cuts.

Of course this is only the first month following gender equalisation so it was perhaps predictable that rates would move significantly. Annuity expert Steve Lowe from Just Retirement argues that rates will ‘become more robust’ over the period of the whole of the first quarter. What will be interesting to see is how these rate cuts affect the overall volume of enhanced annuity sales in 2013.

There has been much discussion recently about the need to introduce a ‘living wage’ instead of the current minimum wage in order that people can enjoy a decent standard of living. Indeed some employers including many Unions and Labour run councils have already adopted the living wage for their employees. However, new figures show that for those that want to carry on this standard of living into retirement it will prove quite a large financial mountain to climb. According to AJ Bell, an individual would have to accumulate a pension pot of £270,000 in order to maintain an annual income of £16,400 a year (the living wage). This income would be made up of an index-linked annuity plus the money received from the new ‘single tier’ state pension, which is currently projected at being £144 per week. This is quite patently a substantial sum of money, made even more startling given the collapse of private pension saving over the past twenty years in Britain. Moreover, the current average non-DB pension fund of around £30,000 is well under this £270,000 figure. So whilst the living wage seeks to provide workers with a decent standard of living whilst employed, when it comes to retirement the picture could very different. In fact even to get a retirement income equal to even the minimum wage (£12,070) requires a pot of £130,000, still well above the national average. An even more eye watering amount, £550,000, would be needed if workers wanted a pension equal to the average salary in the UK which is around £25,000.

The government, who are acutely aware of the danger of a pensions crisis has set about addressing the issue with the introduction of the auto enrolment scheme. This compels employers to provide a contributory workplace pension scheme and to auto enrol their employees onto it. However, this of course only provides the mechanism with which workers can start saving, it does not solve the problem of how to accumulate a pension fund large enough to provide a living wage retirement income. The advice being offered by industry experts is to start saving for retirement as early as possible, and if individuals can, they should supplement their pension with other forms of savings, such as ISA’s.

Of course there are other means of financing one’s retirement, for example downsizing your property, investing the lump sum or releasing the equity in the family home. However these choices are not open to everyone which is why it is prudent to save as much as you can, as early as you can. It is worth noting also that the proposed universal State pension of £144 per week only equates to under £4 per hour if it were a full time salary – could you live on this? All this underlines the urgent requirement for workers to make their own private pension provision to supplement the State pension, which lets face it, has no guarantee of being around in 30 or 40 years time.

You might be looking forward to a long and prosperous retirement but will you live as long as these guys? Here we document the 10 oldest men in the world…

Jiroemon Kimura

Not only is Mr Kimura the oldest man in our illustrious list (and indeed the world’s oldest person) he is also the only living member of the top 10. Mr Kimura gains the status as the world’s oldest person due to the death on 17th December of the previous record holder, Iowa born Dina Manfredini who reached the admirable age of 115 years and 257 days. You might wonder what Mr Kimura’s secret to longevity is. Well according to the man himself he lives by the motto of ‘eat light to live long’ and attributes his milestone of 115 years on earth to eating small, healthy portions of food. Although this will have undoubtedly contributed towards a healthy lifestyle, Mr Kimura may also have benefitted from an active working life as he spent a lot of his career working as a mail carrier and farmer. He has also managed to father an astonishing 14 children, although he has had 115 years within which to do this, many more than most of us will ever get!

Christian Mortensen

Danish born Christian Mortensen (who passed away in 1998) was at the time the oldest man in the world, aged 115 years and 252 days. Despite his age he was never crowned the oldest person in the world, an accolade that was at the time held by Sarah Knauss who reached the age of 117 before she died the following year. As with Mr Kimura, Mr Mortensen was also reported to have worked on a farm which might help explain why he reached the age he did and why also he lived as a vegetarian. However that is where the similarities seemingly end as in contrast to Kimura, Mortensen had no children and was only married for less than 10 years. He also lived out the remainder of his life in sunny California where he allegedly liked to take regular cycle rides. Mr Mortensen also smoked the odd cigar and claimed that moderate smoking was not an altogether unhealthy thing.

Emiliano Mercado del Toro

Emiliano Mercado del Toro known as ‘Emilio’ became the oldest verified living person in December 2006 when he was aged 115 years and 156 days. Sadly for Emilio he passed away the following January but had still become the 34th person to have reached the accolade as the oldest living person as well as being the longest living Hispanic/Latino person. Emilio was also a distinguished military veteran having fought in the First World War. Indeed. he was given a medal by ex President Bill Clinton at the 75th Anniversary of the signing of the truce which ended the War. Emilio’s attributes his longevity to a diet of funche, which is a mixture of corn, cod and milk which he claims he ate everyday. He had no offspring and was never married but did claim to have three special girlfriends throughout his life. He also claimed that his sense of humour also help him prolong his life, reciting short stories including one where he hid under a table during a shooting in a Puerto Rican lap dancing club.

Walter Breuning

Walter Breuning was a Minnesota born railwayman who lived until he was 114 years and 205 days old. Official records show that Breuning was married twice, although he himself claimed that second marriages ‘never work’. Unsurprisingly perhaps he outlived both his spouses, with his second wife, Margaret Vanest passing away in 1974. After he retired as a railroad worker, Breuning continued to work as secretary at a Shriner’s club, something he did until he was 99 years old. Remarkably Breuning managed to recover from Colon cancer which he was diagnosed with in 1960 aged 64. He was also a life long smoker, regularly enjoying cigars and only decided to quit smoking at 103 after claiming they had become ‘too expensive’. However it is claimed that Breuning restarted his smoking habit at 108 after being sent cigars as gifts from all across the globe. Mr Breuning only ate two meals a day, breakfast and lunch, eating only pieces of fruit in the evening.

Yukichi Chuganji

Yukichi Chuganjin lived until he was 114 years and 189 days until his death in 2003. He enjoyed drinking milk each day and his favourite meal was a very healthy portion of boiled chicken and rice. There isn’t much noteworthy information on on this guy so we shall move on…

Joan Riudavets 

Joan despite his somewhat feminine name was in fact a Spanish man who lived until he was 114 days and 18 days. Hailing from the Island of Minorca, Joan remains the oldest ever Spaniard and European to ever have lived. He enjoyed a typical Mediterranean diet of olive, fish and tomatoes but also quite interestingly liked nothing more than a glass of strong muscatel wine. He spent much of his career working as a cobbler. Perhaps his long life can also be explained by the fact he quit smoking when he was 33 in 1922.

Fred Hale 

Fred Hale was a railroad worker from Maine who passed away in 2004 aged 113 years and 354 days. Fred was a keen beekeeper and said eating regular bee pollen helped him stay fit and healthy, although he was also partial to the odd drink of whiskey. Incredibly, Hale at age 95 reportedly gave boogie-boarding a try in Hawaii whilst on the way back from visiting his son in Japan. He also used to shovel snow off the roof of his home aged 103. Interestingly he outlived three of his children. His longevity also meant he had eleven great-great grandchildren.

Johnson Parks

Even less is known about Johnson Parks, other than the fact that he lived in Florida and was 113 and  275 days old when he died. He is still the oldest ever black man to have lived.

Tomoji Tanabe

Tomoji Tanabe was a Japanese civil engineer who lived until he was 113 years and 274 days old. Tanabe unlike some of the other entries in this top 10 never smoke or drank any alcohol throughout his entire life. As you might expect he accumulated a rather large family including 25 grand children and….wait for it….54 grandchildren! That’s hell of a lot of presents to buy at Christmas.

John Ingram McMorran

John McMorran is possibly the most interesting of all the entries in the top 10. According to some reports Mr McMorran liked nothing more than to drink, smoke and eat greasy food. If that is true, then there is surely real hope for the rest of us as he did all this and still managed to live until he was 113 years and 250 days. He also is quoted as saying that a regular cup and avoiding ‘cheap whiskey’ were also contributing factors.