/ Money

Were you born to have a big pension pot?

Baby wearing crown

People buying an income for retirement today may be 30% worse off than those who retired five years ago. So, is the size of your pension pot too reliant on your birth date or can you beat the odds?

The timing of your birth can have a significant impact on your financial well-being. By the luck of being eight years older than me, my brother bought his first property in the mid-1990s. Back then, he could comfortably afford a three-bedroom house in London, and by the time he sold it less than 10 years later, it had quadrupled in value.

I was at university while the property market was booming, and by the time I found myself in a position to buy, the market was peaking. I could only stretch to buying a two-bedroom ex-council flat which, when I sold it six years later, had barely increased in value at all.

Were you born to be wealthy?

But it’s not just timing in the housing market that can have a serious effect on your wealth. A similar lottery has been at play among those who have been reaching retirement over the past decade. While the current generation of retirees are wealthier than any before them, there are big differences between the incomes of those who cashed in their pension five years ago, and those who are just retiring today.

Back in September 2007, a 65-year-old man who turned his £100,000 pension pot into an income by buying a single-life annuity would have received around £7,400 a year. Today, a man of the same age, with the same sized pension pot, would receive less than £6,000 a year.

Worse still, if the man retiring today had left his money invested in the stock market over the past five years, he would have seen his pension pot fall by almost 10%, meaning his £100,000 might now only be worth £90,000. All in all, today’s retiree would have ended up with almost a third less income than he might have if he’d been five years older.

Falling annuity rates

The main cause of the fall in annuity rates is the decline in the rates of income – or yields – paid by government bonds (gilts). Although there are many factors that influence this, broadly speaking, yields are likely to stay low while the current economic uncertainty continues.

So the difficulty for those retiring today is whether to wait for a recovery, or buy their annuity at today’s low rates. Unfortunately, neither is a safe option. Although gilt yields will certainly rise again eventually – perhaps once the euro crisis blows over – it could be years rather than months. Meanwhile, for every month you put off buying an annuity, you’ll be missing out on a month of income.

Although you could leave your money invested, you’ll need to earn over 5% to beat what you’d have made from your annuity. Furthermore, with new anti-gender discrimination laws taking effect in December, men are likely to see annuity rates fall further over the coming months – and there’s no certainty that women’s annuity rates will rise on the back of these changes.

Only those with large pension pots who can afford to take additional risk should consider timing the purchase of an annuity. And even then it’s important to shop around for the best annuity rates.

While there’s no justice that today’s retirees may be 30% worse off than their older siblings, the best course of action for most is still to buy your annuity as soon as you can. Although conditions are bad, they may well get worse before they get better.


The problem you have identified creates clear inequality at the point of retirement but the current economic uncertainty is but a minor factor in keeping annuity rates low. The overwhelming driver in declining annuity rates is the pattern of increasing longevity over several decades.
The inequality you describe is trivial in contrast to the inequality between those retiring in final salary pension schemes and those who have money purchase arrangements.
There are glaring inequalities in pension outcome created not just by when you retired but also by the type of pension arrangements you had and whether you worked in the private sector, the public sector, or if you were self employed.