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Retirement incomes are 7.9% lower than last year

Retirement incomes are 7.9% lower than last year

Category: Annuities

Updated: 14/09/2015
First Published: 14/09/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The recent pension reforms have given retirees far more choice over how they spend their pension pot, with annuities no longer being the sole option for many. However, this extra flexibility has come at the expense of those who still want the guaranteed income that annuities can bring – lower demand has led to a sharp drop in annuity rates, so much so that the average income is almost 8% lower than it was a year ago.

Annuitants are losing out

Our latest research shows that retirees who choose to take out an annuity are set to receive annual retirement incomes that are 7.9% lower than those received by retirees last year, which could make it even harder to enjoy a comfortable retirement. The analysis looked into the impact of the changing value of pension pots and fluctuating annuity rates on retirement incomes, with the figures based on someone contributing £100 per month into an average personal pension fund over a 20-year period.

The results show that those who retired in September last year would have accrued a pension fund of £44,089, and if they'd have chosen a standard level without guarantee annuity, they'd have an average annuity rate of £520 per £10,000, which equates to an annual retirement income of £2,292. Fast forward to today, and the same retiree would have a pension pot of £42,440 with an annuity rate of £497 per £10,000, equating to a yearly income of £2,109.

This is a drop of 7.9% and is fast approaching the all-time low of £2,065 recorded in September 2012, and it's also a far cry from the kind of income that could be achieved just 15 years ago. Our figures show that someone who saved the same £100 per month over 20 years would have built up a pension fund of £89,366 by September 2000, and thanks to far more favourable annuity rates of £867 per £10,000, they'd be left with a retirement income of £7,748 per year (see table below).

Maturity date Pension fund value Annuity rate per £10K Annual retirement income
September 2000 £89,366 £867 £7,748
September 2014 £44,089 £520 £2,292
September 2015 £42,440 £497 £2,109
One-year change -3.7% -4.4% -7.9%
15-year change -52.5% 42.6% -72.7%

Contributions aren't enough

What's even more worrying is the fact that pension contribution levels are wholly insufficient and are in no way bringing retirement incomes back to the levels enjoyed 15 years ago, with the average amount saved not rising quickly enough to compensate for lower investment returns and falling annuity rates. In fact, it's poor investment returns that are having just as significant an impact on retirement incomes as falling annuity rates, with today's retirees simply not able to build up the same kind of pot that they did in the previous generation.

This is the reason why £100 saved per month would have built up a pension fund of £89,366 by September 2000, but just £42,400 today. However, it may not be that easy to bridge the gap – as the table below shows, even saving £300 per month may not be enough to achieve a decent income, as although it'll result in a bigger pension pot, the annuity rates on offer still won't give you a significant pay off.

Maturity date 20-year pension fund value Annuity rate per £10K Annual retirement income
September 2000 £89,366
(based on £100 per month)
£867 £7,748
September 2015 £127,322
(based on £300 per month)
£497 £6,327
Difference despite higher contributions +42.4% -42.6% -18.3%

This all means that there's "a real danger that tomorrow's pensioners will end up in poverty", said Richard Eagling, editor of Investment Life & Pensions Moneyfacts. "Private pension provision is still being neglected, and dreams of a comfortable retirement could easily be shattered unless individuals can either make up the pension shortfall through greater contributions, or accept that they may have to delay their retirement.

"It is vital to increase awareness not only of pension options, but also the potential retirement income outcomes, as too many people have outdated and unrealistic expectations as to what they will eventually receive."

What next?

If you're approaching retirement – or even if you're decades away from it – it's vital to know what to expect. Read our retirement or pension guides to get more information, or speak to an independent financial adviser to look for ways to maximise your contributions and potentially enjoy higher returns.

It's also important to remember that, despite the lower rates on offer, an annuity is still the only way to guarantee an income for the duration of your retirement, so they could still be worth considering for those who want that kind of security. However, don't accept the first quote you come across – use your open market rights and shop around to compare quotes, ideally by contacting our no-obligation annuity planner to discuss the options.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.