Do our counterparts in other countries get a better deal on annuities or do they have other products that provide a bigger income in retirement?
• Click to enlarge
If you think annuity rates are bad in this country, spare a thought for Irish pensioners. They get about 4.9pc if they retire at 65, compared with about 5.8pc in Britain. But is there anywhere in the world that savers can get attractive annuity rates? Or have any countries found other means of getting a retirement income to offer pensioners a better deal?
The week The Daily Telegraph investigates how other nations deal with the problem of converting pension savings into a regular income, and how their approaches compare with the British system.
While annuities attract a lot of criticism this newspaper disclosed last week that some annuity companies make profit margins of about 20pc, and others are thought to make even more they offer the only means of guaranteeing a specified income for life. Other means of providing a retirement income offer more flexibility and the chance of a higher income, but there is always the risk that you run out of money before you die.
In many countries, people are particularly exposed to this risk because there are no restrictions on how pension pots are used.
In fact, the British system of forcing pension savers to use most, but not all, of their accumulated savings to produce an income is the best in the world, according to David Knox, author of the Melbourne Mercer Global Pension index, which compares pension arrangements around the world.
"It's actually quite rare for pension savers to be required to put their savings towards an income," he said. "[But] the primary objective of a private pension system should be to provide income during retirement."
However, while savers should be required to use most of their money to provide an income, they should also be allowed to take some of their pension as a lump sum, he added. "Britain has struck this balance better than anyone else," Mr Knox said. Some countries, including Canada, Holland and Sweden, force savers to convert their entire pension pots into an income stream, although the income can come from a "drawdown" product rather than an annuity.
The Canadian annuity market is broadly similar to Britain's but rates are better; a 65-year-old Canadian can get as much as 6.7pc, according to lifeannuities.com, a Canadian comparison service. The Irish system also resembles Britain's, although rates are lower. While the UK's annuities tend to be based on gilt rates, Irish insurers tend to buy French and German government bonds Ireland (OTC BB: IRLD - news) 's bond market was badly disrupted by the eurozone debt crisis. Unfortunately, while French and German bonds are seen as safe, returns are low.
However, the Irish annuity market is pretty competitive, according to Barry Mooney of Invesco (NYSE: IVZ - news) , an Irish pensions company unconnected with the British fund manager of the same name.
Holland's relatively small annuity market is different, however. In common with several other northern European countries including Denmark, Germany and Belgium, the Netherlands' market is dominated by "guaranteed deferred" annuities.
These share some characteristics with the investment-linked annuities sold in Britain, where your income depends to some extent on investment performance. However, the Dutch version is part of an integrated pension product taken out earlier, during the accumulation phases. Bonuses are added both before and after you start to take an income, subject to a minimum specified at the outset.
Annuities in Sweden, which are provided entirely by the state, are also investment-linked. Similar products, although not state-provided, are popular in America and Japan.
Some countries, such as France and Singapore, require only small proportions of pension pots to be used to produce an income.
In countries where there is no compulsion to buy an annuity with the majority of your savings, the market for annuities tends to be small and underdeveloped there seems to be a worldwide reluctance to buy them voluntarily.
Annuity markets in France, Italy and Japan are small, mainly because of relatively generous state pension systems and occupational pension arrangements.
"Italy has a very generous state pension; as a result I think only a few hundred annuities are sold in the country each year," said Edmund Cannon, an academic at Bristol University who is an expert on annuities.
It will come a shock to many savers, but Britain has the most advanced annuity market in the world, experts say. In particular, other countries are not as advanced in offering "enhanced" annuities, which pay more to those with reduced life expectancy, and inflation-linked incomes.
What happens in countries where there is no requirement to buy an income stream?
"In many countries there is no need to buy an annuity total flexibility is much more common," said Stephen Ainsworth of BWCI in the Channel Islands. "People buy property or other investments to buy an income."
America, Australia, Japan and Germany are among the nations that allow savers to use their pension pots however they like; there is no requirement to buy an annuity or a drawdown product and they can spend the entire amount immediately if they choose.
Mr Ainsworth added: "In my opinion, annuities abroad are just as unattractive as in Britain if not more so."
Drawdown plans are more popular than annuities in Australia. The plans require you to take a minimum income but there is no maximum. However, pensioners can take out fixed-term annuities with a portion of their savings when they get older. A 10-year plan could pay a fixed income of 12pc, for example, but with no final payment.
Conventional annuities in Australia also offer a feature that would appeal to many savers in Britain the ability to cancel the contract and receive some of your money back. "It's a bit like surrendering a life insurance policy," said Mr Knox. "There may be a penalty, but you are allowed to bail out although only in the early years."
Ireland offers a similar option called an "approved retirement fund". The minimum income you can take from it is 5pc and there is no upper limit as long as you have at least €12,700 a year (£11,100) from other sources of guaranteed income. This is less onerous than the equivalent threshold in Britain, which is £20,000 a year.
"Savers with bigger funds tend to take this option, whereas those with smaller pots usually want certainty and buy an annuity instead," said Mr Mooney. Pensioners who opt for drawdown initially can use their fund to buy an annuity at any time.
Ros Altmann, the pensions campaigner, said: "I am really concerned that British pensioners are being locked into very poor value annuity rates, which will consign them to a much poorer retirement than they deserve.
"The UK system, which encourages people to put all their retirement savings into one very expensive, irreversible financial product, is potentially short-changing millions of our pensioners relative to those in other countries who are not annuitising.
"In addition, if pensioners have locked all their pension money into an annuity, they will have nothing left over in case they need to fund long-term care. Annuitisation is a very old-fashioned idea which does not fit well with modern retirement needs. Other countries seem to have a much more sensible approach, leaving more flexibility and choice for their retirees."
= Looking for a better annuity rate?
Try the Telegraph Retirement Service >> =