Pension savers approaching retirement are facing the lowest annuity rates for 20 years meaning their income will be sharply reduced.

A pension pot of £100,000 will now pay out £6,350 annually whereas in the 1990s it would have generated an annual pay out of closer to £15,000. Add to that the low Bank of England base rate and savers are getting an even worse deal for their pensions.

However, Saga has said that buying an escalating annuity could protect your lifestyle in retirement against rising costs.

Research from the Saga Annuity Service reveals that a person who took an escalating annuity out in 1995 would now receive on average £6141 more a year compared to someone who had opted for a fixed version.

With current standard and enhanced annuity rates as low as half the rate they were a decade ago this type of annuity could help provide extra income. But despite this Saga’s research shows that only 5 per cent of those buying an annuity take one which provides an increased income over time to account for inflation.

Andrew Goodsell, Executive Chairman, Saga Group, comments: “Maintaining the buying power of pension income in retirement is incredibly important in helping people enjoy their lives. Escalating annuities offer peace of mind by providing a buffer against increasing inflation and retail prices, allowing people to lead more comfortable lifestyles in retirement.”

Pension reform is high on the Government’s agenda as the emergency budget approaches and figures this week have revealed that public sector pension could cost every household £4,000 a year.

A report from the Office for Budget Responsibility showed that In 2010-11, the amount spent by the taxpayer on public sector pensions will be £4 billion, rising to £5.5 billion the following year.

The cost will then rise by 20 per cent each equating to almost £4,000 for each every home.

The news has put pensions at the forefront of the coalition’s attention and measures for reform are expected to be announced next week in the emergency budget.

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