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England: a free pension or a guarantee income?

Thousands of the British need to decide, reports
England: a free pension or a guarantee income?

Earlier in the UK, a fixed payment was the most popular way to save for retirement. You and your employer save a certain amount, and then, upon retirement, receive a payment depending on your service life, salary and savings ratio in the bank. Pension payments are guaranteed and indexed to the rate of inflation. Most often the pension is accrued based on the salary at the end of your career, hence the name “final salary”.

Today, the country's leading method of retirement savings is a defined contribution: rising costs forced employees to stop saving on retirement by fixed payments. Under these rules, you and your company save money on the account, however, there is no guarantee the payments will be made.

Upon retirement age, you simply receive money in your bank account at your sole discretion. You can buy a pension annuity, choose the income withdrawal scheme, or simply withdraw cash when necessary.

More than 30 thousand of British people saving for their retirement were offered a large supplement to their accruals in exchange for giving up high annuity rates. Thus, the letters of Royal London insurer offer to increase the pension deposit from 30 to 48 thousand pounds sterling under the conditions specified above.

Guaranteed rates were part of millions of pension policies sold in the UK in the 80-90s, when interest rates were much higher.

With today's best annuity rates for savings of 100 thousand pounds sterling, a 65-year-old pensioner can buy himself a pension of 5,400 pounds a year for the rest of his life. The guaranteed rates are 9-13%, which means that the pensioner would receive twice as much as the estimated income, 10 thousand pounds sterling per year or more.

However, since the policies were sold, the average life expectancy has risen and interest rates have fallen to historical lows. Pension companies have to look for expenses that they cannot control.

Royal London Company sent letters to 33,000 former customers of Scottish Life Company, acquired in 2001, in anticipation that customers would be interested in the innovation. The official offer is expected in June, if Royal London by that time passes its legal implementation.

The company recognizes that rates are of high value; however, acceptance of the offer leads to a serious increase of the pension deposit size and will allow people to dispose of their savings the way they want.

According to the consultants, "Only very few people should give up the guaranteed annuity rate". On the other hand, they believe, if someone does not want to buy an annuity, or if the guaranteed offer does not include a spouse's pension, then such a rate may not be as valuable as it seems.

The representative of Royal London comforts the customers: "Every client can keep his guarantees if he wishes; the changes will not affect him. Currently, most pensioners with these guarantees, especially those with small pension savings, withdraw their savings into cash without getting any benefits from guaranteed rates, because they prefer to simply withdraw the required amount from the account".


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