The bankers have destroyed our pensions

Greedy bankers and inept politicians have destroyed the retirement plans of hard-working savers. In the second of his series on money dilemmas facing real people, Harvey Jones explains why this makes his blood boil.

How would you feel if your income had just fallen by almost £15,000 a year? A little bit miffed, I would hazard.

Well, that is what has happened to my friend Jenny's dad Graham and his wife Linda, and tens of thousands like them, who were heading for a comfy-ish retirement until the credit crunch struck.

They're not on the breadline, as you will discover, but things haven't turned out as they hoped.

But what on earth can they do about it?

What's new, pussycat?

I haven't met Graham and Linda in person, but I've heard a lot about them from my friend Jenny, who was intrigued to know why I was so interested in her parents' pension woes.

I said I wanted to publicise them on super-whizzy everyday money site lovemoney.com and she said:

"My dad won't want to share his personal financial details with a bunch of strangers on the net!"

To which I said:

"They're not a bunch of strangers, they are reputable community of registered members who are kind to children and love to share their opinions on financial matters, often in a forthright manner."

"They won't be all sweary and abusive, will they?"

"No, they're pussycats. They only get annoyed when I write about my opinion on house prices, then they all jump on me at once. And anyway, I will only identify him as 'my friend Jenny's dad Graham'."

"And his wife Linda."

"It's a deal."

The state pension we're in

My friend Jenny's dad Graham is an accountant, recently retired, who recently started drawing his basic state pension.

The state pension isn't exactly riches, the most you will get is £87.30 a week (£4,540 a year) if you are single and £139.60 a week (£7,259 a year) for a couple. Depending on your contributions, you might get much less.

But it does have two great virtues. First, it is underpinned by the state, and isn't dependent on stock market performance.

And second, it rises in line with prices, and should track earnings from 2012, which is even better.

My friend Jenny's dad Graham and his wife Linda worked hard for decades and also earned additional state pension benefits on top of the basic state pension. In total, Graham gets £9,000 and Linda gets £6,000 a year.

So that's a start.

A pox on your annuity rates

They have a combined occupational and private pension pot of £100,000. They are wavering over whether to turn this into an annuity now, or keep the money invested in the hope that stock markets recover.

They are also wondering whether to take a level or an index-linked annuity. After shopping around, they were quoted a level income of around £6,500 a year, or £3,900 if they want it to rise in line with prices.

My friend Jenny thinks these annuity rates are "poxy", especially the second one, and I agree, although I point out that it will keep rising, year after year.

"It's still poxy, though."

"If they can afford to hang on until inflation and interest rates pick up again, they might get more."

"Then they should wait!"

What do you think they should do? Let us know using the comment boxes below!

The banks strike again

One of Graham and Linda's biggest sources of anticipated income was from dividends on stocks and shares. And this is where the blow has really fallen.

They were earning around £10,000 a year, mostly from banking dividends, but this has almost dried up. Despite the recent semi-recovery, their portfolio remains a fraction of its former value.

They also have around £100,000 in cash and savings bonds. A couple of years ago, they might have expected to earn up to 7%, now they are averaging around 2%.

So instead of £7,000 a year, they are getting £2,000, a fall of £5,000 a year. Hence the total £15,000 loss.

Returns on fixed-rate bonds have recovered slightly, and they have just seen Clydesdale Bank offering 5% a year, provided they tie their money up for five years.

Snatched away

This isn't a sob story. Plenty of people are worse off than them. But they are frustrated to have planned and saved hard for their retirement, and now the rewards have been snatched away.

This is what Jenny says about her dad: "He's pretty stoical but quietly boiling with rage. He has always planned for the future, denying himself holidays or new things, so it must be difficult to see it snatched away. They were really looking forward to not worrying about money for once, but that has changed."

What I think

Millions of us are heading for poverty in retirement, but many of us will deserve it, because we would rather spend for today than save for tomorrow. That's not the case here.

I am outraged by what has happened to my friend Jenny's dad Graham and his wife Linda, and many others like them, because they did everything people like me were telling them to do, saving their pennies in pensions and shares, and now feel cheated.

Perhaps I also feel a little guilty. 

Over to you

So here are my questions.

1. How miffed should they feel? You might argue they should still be able to generate an above average retirement income, and should be content. Although I would say they have a lot more cause to feel cheated than people who haven't saved anything.
2. Should they go for that annuity, or keep their pension invested in the hope that markets will recover and its value will creep upwards? Can you see a recovery?
3. And if they do go for an annuity, should they take a level income or make it index-linked, to protect against inflation? Remember, the state pension is already inflation-proof. Jam today or jam tomorrow, that is the question.
4. Would you lock into a savings bond at 5% over five years? If inflation picks up again, you might rue your decision.
5. A broader question. What is the point of any of us squirrelling money away if a combination of greedy bankers and inept politicians can snatch it away at the last minute?

Tell us what you think

Readers of lovemoney.com gave it a real go when I asked what my friends Rachael and Chris should do about buying their first home. This is a more complex case. Are you up for it? Tell us what you think using the comment boxes below!

More: Become a pensions expert in five days | The biggest financial mistake of all

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