The financial crisis has a real human cost.
The last four years have been a disaster for anybody buying an annuity. In July 2008, a 65-year-old man buying a level annuity with a £100,000 pension pot could have bought £7,855 income a year. Today, he would get just £5,743, an incredible £2,112 a year less, according to Hargreaves Lansdown (LSE: HL).
Once you have bought an annuity, you are stuck with it for life. If our unhappy pensioner lived another 20 years, he would have lost £40,240 in total.
To make matters worse, his pension pot is likely to be smaller, because of the hammering handed out to equities. The financial crisis has a real human cost.
How low can you go?
Tumbling annuity rates are largely down to the Bank of England (BofE)'s Weimar-esque policy of printing its way out of the financial mess we are in. On Thursday it is expected to dash off another £50 billion, on top of the £325 billion it has already printed, equivalent to roughly 20% of the UK's annual GDP.
Every time the BofW prints more virtual money to buy gilts, it forces down gilt yields, and those lower yields are quickly reflected in annuity rates.
With some pundits predicting quantitative easing (QE) will top £500 billion in total, things can only get worse.
Quantitative, not quality
So far, more than one million pensioners have been quantitatively eased into a poor standard of living. In its defence, the Bank of England claims QE has protected pension pots, by propping up asset prices.
The truth is, nobody knows what would have happened without QE. The BofE suggests the alternative would have been economic ruin, but it has failed to produce any evidence that virtual money printing has boosted growth and employment in the real world.
One thing is certain. It has punished thrifty savers to bailout spendthrift borrowers, profligate politicians and greedy, shameless bankers.
Annuity nightmare II
Anybody approaching retirement now faces a miserable choice. Should they buy an annuity at today's rotten rates, or delay in the hope they recover?
Those who postponed their purchase over the last few years will have regretted it, as rates have been driven lower and lower. And the trend looks set to continue, thanks to a combination of continuing QE and forthcoming regulatory changes.
The European Solvency II directive, to be implemented in November, will force annuity companies to hold more capital in reserve to guard against financial shocks, forcing rates even lower.
And in December, the EU will make it illegal to offer different annuity rates based on gender. Currently, men get better rates than women, because they typically don't live as long. In future, rates will be equalised. Men will get a worse deal, while women will only see a small improvement.
When you throw in rising life expectancy as well, there is little prospect of a great annuity rate revival.
Divide and rule
If you're approaching retirement, there are some things you can do to mitigate the pain. You don't have to commit all of your pension pot to an annuity.
You could convert, say, half of your pot into income drawdown, and leave the rest invested for income. That way you will reap the benefits when markets finally recover.
You can then use the rest of your pot to buy an annuity. Or rather, two annuities.
You could spend half the money on a level annuity, to get the best possible income now, and the remainder on a rising annuity, to ensure your income keeps pace with price rises. Because at some point, all this money printing will surely end in inflation.
Remember, you can also take 25% of your pension asset tax-free lump sum.
A Foolish dividend
If you are a wise Fool, you will have another trick up your sleeve. You will have used your ISA allowance to build a portfolio of tax-efficient income-generating shares.
If you've done that, you won't be completely skewed by falling annuity rates. My own portfolio includes Aviva (LSE: AV), which currently yields 9.1%, Vodafone (LSE: VOD) yielding at 5.3%, GlaxoSmithKline (LSE: GSK) at 4.9% and Royal Dutch Shell (LSE: RDSB) at 4.8%.
Other top FTSE 100 (UKX) dividend-paying stocks include BAE Systems (LSE: BAE) yielding at 6.5%, Standard Life (LSE: SL) at 5.9%, National Grid (LSE: NG) at 5.7% and Sainsbury's (LSE: SBRY) at 5.2%.
Better still, all of these have substantial scope for capital growth, when the economy finally recovers.
These are dismal times for anybody relying on an annuity for all of their retirement income. If you are holding dividend-friendly blue-chips as well, life looks a bit more cheerful.
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> Harvey owns shares in Aviva, Vodafone, GlaxoSmithKline and Royal Dutch Shell. He doesn't directly own any other stocks mentioned in this article. The Motley Fool owns shares in Hargreaves Lansdown.
