How you can lose £820 a year by not getting the most out of your nest-egg: The pension trap that snares one saver every minute

For decades, taking your pension couldn’t have been simpler. You paid a small amount of your salary into a pot, your employer put some in, too — then on your retirement day you were guaranteed to get an income.

The amount you received was based on your final salary and the number of years you had worked for that firm. Typically, if you had been employed by the same business for 30 years, and were paid £30,000 when you retired, you’d get a £15,000 pension.

Every year that sum would increase with inflation, and would continue paying out half of the income to your spouse after your death. It meant a comfortable retirement for many savers.

Pension trap: Every year 168,000 retire with a far lower pension than they're entitled to


Today, only one in ten private-sector workers pays into one of these gold-plated final-salary schemes — and this figure falls every year.

And with the basic state pension currently at just £5,728 a year for a single person, there are thousands of people who will go into their retirement with a total income that won’t pay for their lifestyle.


The private pension schemes have been killed off by two things: our rising life expectancy, which has meant businesses can no longer afford to pay out such generous benefits for extra years; and a tax on dividends in pension funds — introduced by Gordon Brown when he was Chancellor.


As a result, most workers these days are given what are called defined contribution pensions.

Your savings and the contribution of your employer are paid into a pension fund run by an insurance company. This is invested in the stock market and what you get out of it at the end will depend on how these investments have performed — minus any charges the insurer makes for looking after your money.

It means someone who started on a salary of £15,000 and retired earning £30,000 would have a pension pot of £67,000. (This assumes their investment grew by 5.5 per cent a year and they paid in 8 per cent of their salary for 30 years).

Savers then have to turn this nest egg into an income. To do this, they have to take out what is called an annuity, which is offered by insurance companies.

A 65-year-old who wanted the same benefits as a person in a final-salary scheme would get an income of £2,050 a year from their savings pot of £67,000. To match the income of £15,000 they would need a pot of £430,000 — that means saving £737 a month for three decades.


Poor pension payout: But Liz Buckle shopped around for a better deal and received a 40 percent boost


Liz Buckle, 63, suffers from multiple sclerosis as well as high cholesterol and blood pressure. Over the years she has worked as a secretary at an engineering firm she has built up a £45,000 pension pot.

Her pension company Friends Life sent her a letter saying she could take a lump sum of £11,250 and a £1,480 a year income. But a relative put her onto the Nationwide building society, which runs an annuity comparison service. It found her a pension with insurer Just Retirement that would pay her £2,059 a year — a boost of 40 per cent — because of her medical condition.

Mrs Buckle from Darlington, Co Durham, says: ‘The pension system is quite confusing. Unless you are knowledgeable about these things, it can be very difficult for ordinary people.’

Friends Life didn’t offer enhanced annuities when it contacted Mrs Buckle. A spokesman says: ‘Anybody buying an annuity should establish whether they’re able to qualify for an enhancement and shop around.’


There is little chance of bringing back the marvellous perks of final-salary schemes. Today, saving into a pension can be daunting. Many people hit retirement age and discover that the pot of money they have saved is going to be far from adequate.

One major step forward has been to automatically enrol every employee into a company pension. By 2017, 11million workers will be contributing into a pension for the first time.

While this is a big improvement, as it will give pensions to many who would either never have had one or waited several years to start, many people will still hit retirement age with a much smaller income than they had hoped for. This is because savers are largely left to their own devices and have little idea of how much they’ll need in retirement.

Annual pension statements are sent out by all firms, but these can simply state how much money has been saved, and a predicted retirement date — largely meaningless figures. Savers need to know how much has been lost to charges, how much has been contributed, and how the pension funds have performed.

On top of this, savers rarely increase their contributions — just relying on the bare minimum that their company takes from them. Often people realise too late that they need to save more. Putting more money aside earlier can have a dramatic effect: you could get an income of £16,000 by saving £357 a month (including your employer’s contribution and tax relief) from age 25.

But if you don’t start saving until you are 45, you’d have to save £935 a month to get the same income.


A major failure in the way pensions work happens at the point you convert your pot of money into an income. Few people understand — or care — about how their retirement savings actually pay out money.

As far as they are concerned they are paying into a pension that will provide some kind of regular payment. It is at this point that a significant amount of damage can be done — because once a decision is made it can be impossible to undo.


Some insurers are making huge profits by deliberately offering duff deals to customers who know no better. New Money Mail calculations suggest as many as 168,400 people retiring every year — that’s more than one every minute of every working day — may be facing a rotten payout. And there’s no undoing the harm that is done. So, how does that happen?

Six months before retirement, your pension company will send a letter. This pack is supposed to alert you that retirement is only a few months away. In this letter some firms outline how much income they will pay you from your savings. It also explains that you can shop around for a different income.

Three months later, you will be sent another pack. If the previous letter didn’t, this one will definitely include an offer of an income — sometimes more than one, depending on the insurer. In the offers they send out, firms typically have calculated a very basic income. This will pay a flat amount every year until you die. After this, it will cease.

Firms often don’t include an income that will continue paying to a spouse after the saver dies, or rise in line with inflation, or reflect any health issues a person may have. As a result, many consumers sleep-walk into deals that are utterly unsuitable — it deprives them (and sometimes their spouse, too) of tens of thousands of extra income.

Last year, after a decade-long battle, insurers finally launched a code of conduct, which they themselves are in charge of upholding. A crucial part of the code is that pension companies must make clear that customers have a right to shop around and that better payouts may be available.

But the information sent by insurers is so lengthy — in some cases as many as 60 pages long — and jargon-packed that this crucial detail goes missing. The whole process is baffling — and, as a result, many retirees fail to do anything.

In this scenario, they are dumped on to the rate their insurer has offered.


Shopping around: John Denny and his wife Dorothy

Shopping around: John Denny and his wife Dorothy

When 66-year-old John Denny retired he had £70,000 in pensions split across several different pots.

Having read about pensions in the Mail, he realised he should shop around for the best deal — particularly as he wanted his pension to keep paying out to his wife, Dorothy, if he died.
Mrs Denny, 67, had recently recovered from cancer.

Mr Denny, a former IT contractor from Chester-le-Street, County Durham, visited a bank, a building society and an independent financial adviser to find the best offer.

He found it complicated. Staff at one insurer told him he would struggle to get a deal that paid out more because of his wife’s health, and he was quoted an income of £3,000. Finally, insurer Just Retirement offered an enhanced annuity of £4,000 a year.

Mr Denny says: ‘Some of the insurers offered really pathetic quotes. Even though I had made the effort to get clued up, there seemed to be a lot of pitfalls and at times I found the whole thing overwhelming.

‘Insurers really do need to make things simpler for ordinary savers. You are making a major decision and the pension you choose will be the one you receive for the rest of your life.’


A 65-year-old saver with a £100,000 pension pot retiring today could be offered as little as £5,272 a year from Prudential, according to the Money Advice Service this week. Yet they would get £6,091 through Hodge Lifetime. This is for a bog-standard type of income.

In a typical 19-year retirement, this person would lose £15,561 by blindly sticking with the first firm. They could get much more, or an annuity that would pay benefits to their partner.

If the saver were married to a person their own age, they could get an annual income of £5,740, which would pay £2,870 to their spouse when they died. Or, if they had type-2 diabetes, they could get £6,697.

This is because their medical symptoms mean their life expectancy is shorter and, as such, their pot of money is expected to stretch over less time. Over 19 years this adds up to £27,075 more than the first income they were offered and could have unwittingly accepted.

Tens of thousands could be missing out on this boost to their income. One in 20 people suffers from diabetes, one in five is obese and two-thirds have high cholesterol. Around 13 per cent of over-60s smoke. A person with any of these conditions should get a bigger pension.

However, even those who do shop around for the best quote are put off by the confusing language that is used and daft rules that can prevent them from taking smaller pension pots as cash and ending up with an income of just a few pounds a month, or drawing money down regularly without the need for taking an annuity.


Some 400,000 people a year take an annuity. There has been no official analysis of how many savers are sleep-walking into terrible pension deals — although a report is expected from the consumer regulator, the Financial Conduct Authority, next month.

Figures compiled by the insurers themselves suggest 200,000 people a year stick with the income originally offered. From the data, it is impossible to say whether these standard payouts may have been the best on offer.

However, of the remaining 200,000 retirees who did shop around, we know two in three got a bigger income because they had poor health. And we know that of those people who visited a financial adviser for help deciding what to do with their pension, only one in seven was recommended to stick with the income they were originally quoted.

Both these factors suggest many people who do not shop around are taking an income that is far lower than they could otherwise have got. And, in recent years, the income paid out on annuities has plunged.

In 1995, a saver with a £100,000 pot could get £11,380 a year — almost double what they can get today. With questions about the value of annuities and such staggering differences between the best and worst deals, it is critical that the pensions industry faces some tough reforms.