Pension savers, who opened with-profits policies in the 1990s, could receive a fraction of the cash they were told they'd get when they started saving. A report has revealed that some people who would told they could expect around £29,000 a year in retirement could in fact get just £3,774.
Money Mail has published the figures, which have been caused by two crushing forces: with-profits disasters, and annuity pain.
The first issue is that with-profits investments have largely been disappointing. The aim of the funds was to hold some of the investment returns back in the good years, so they could make up for shortfalls in the bad years. Unfortunately, they failed to 'smooth' returns in the way they were intended, because they didn't predict just how bad the bad years would be.
In the late 1990s they paid high bonuses because they didn't predict that things would change - and they invested too much in shares. When the market crashed in 2000-2003, they lost enormous sums of cash, and investors are still paying the price. Instead of cutting bonuses dramatically overnight they smoothed the losses - so investors continued to pay in the good years.
To add insult to injury, the experts point out that the very idea of with-profits is pointless for regular investments anyway. The idea is to smooth out performance, but by investing every month for decades, you are effectively doing this anyway - because you are spreading out your investments - so you never buy too much at the top of the market.
The second force is that annuity rates have plummeted, so that turning the lump sum into an income for life has left people with much less than they were expecting. Annuity rates have been hit by a combination of low interest rates, and people living longer, so as a result they have halved since the 1990s.
Money Management magazine crunched the numbers, and discovered that it was perfectly possible to have been putting £200 a month into a with-profits pension for twenty years, and get an annual payment of just £3,774 at the end.
What should you do?
It's enough to make investors consider getting out of their pension, and shifting elsewhere. However, before you panic, it's worth pointing out that not all with-profits policies are equal. While some produce disappointment year after year, other providers have been stronger, and have produced returns that are far closer to expectations. Before you do anything, therefore, have a look at performance.
By the same token, not all annuity providers are equal, so don't assume you will be getting your annuity from your pension provider, and take a look at what is available on the wider market when you are calculating your pension income.
If your with-profits policy has fallen short, check what a move will cost you. Unfortunately, many of these policies come with exit penalties, so you need to check whether withdrawing your investments will leave you worse off.
In some cases, the policies also have guaranteed annuity rates written into their contracts, which offer protection from falls in annuity rates. It means that if you hold this kind of pension, you need to check the small print to see whether you should hang onto them. In many cases it's worth taking advice from an independent professional.
Regardless of the approach you end up taking, it's a useful reminder that we need to be on top of our personal pensions. If you have a pension plan, it's essential to check what it is invested in, how well it has performed compared to the predictions you had at the outset, and what it is predicted to be worth when you retire.
If your findings are disappointing, then the earlier you check, the more time you have to switch to another provider or another fund, to increase your monthly contributions, or even to rethink your retirement plans.