“Challenging conditions” for personal pensions | moneyfacts.co.uk

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Published: 15/08/2017
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Private pensions are becoming increasingly important, particularly with the Government recently announcing that it's bringing forward the rise in state pension age to 68
by seven years. It'll therefore come as worrying news that the economic environment for personal pension investors weakened in the second quarter of the year, with a marked drop in pension fund performance.

Slower growth…

The figures, taken from the latest Moneyfacts UK Personal Pension Trends Treasury Report, show that the average pension fund saw growth of just 1.4% between April and June this year, down from 4% in the previous three-month period. There was also a noticeable increase in the percentage of pension funds that didn't produce any growth whatsoever, rising from just 5% in Q1 2017 to 29% in Q2 2017.

It isn't all bad news – at the halfway point of the year the average pension fund has still grown by 5.6%, leaving 2017 on track to be the sixth consecutive year of positive pension returns – but with yet more disappointing figures in the annuity sector, upcoming retirees may not be rejoicing too much.

… and falling income

Additional data show that the average annual annuity income fell during the second quarter, following two consecutive quarters of rises, with rates falling considerably.

The figures show that, in the standard annuity market, the average annual income payable from a level without guarantee annuity for a 65-year-old fell by 2.1% for those with a £10,000 pot, and by 1.7% at the £50,000 purchase point – back down to the levels at which they started the year. Despite this, average annual annuity income is still 3.1% higher than a year ago, but the latest drop certainly won't be welcome.

It's a similar picture in the enhanced annuity market, but here, it remains lower on an annual as well as a quarterly basis: while average annual income from an enhanced annuity fell by between 0.8% and 1.2% during Q2 2017, less than average standard annuity rate falls, enhanced annuity income is still 1.4% lower than a year ago.

This is all having a knock-on effect on retirement incomes. As the table below shows, the average income for someone who took an income from their personal pension at age 65 through a standard level without guarantee annuity fell by 1.9% during the quarter, something that's particularly disappointing given that it hit a 33-month high in Q1.

Maturity date Pension fund value* Annuity rate per £10k** Annual retirement income
1 July 2017 £47,931 £465 £2,229
1 April 2017 £47,864 £475 £2,273
Difference +0.1% -2.1% -1.9%
Source: Moneyfacts.co.uk Personal Pension Trends Treasury Report Q2 2017

This is due to the combination of lower annuity rates and more subdued pension fund performance, but all is not lost – the average retirement income of £2,229 is still 12.5% higher than a year ago, and up slightly on the average at the time when pension freedoms were first introduced.

"The FCA's recent Retirement Outcomes Review Interim Report has brought pension freedoms and retirement income back under the spotlight," said Richard Eagling, head of Pensions at Moneyfacts. "However, while pension rules and regulation provide the framework for securing good retirement income outcomes, the economic environment will be the deciding factor.

"The second quarter of 2017 proved to be more difficult for pension fund performance, while annuity rates fell after two consecutive quarters of growth. The Government's decision to bring forward by seven years the rise of the state pension age to 68 will put more pressure on private pension provision at a time when the economic landscape remains challenging for those looking to generate and secure a comfortable retirement income."

What next?

Conditions may be challenging, but that doesn't mean you should turn your back on pension saving. If anything, it makes it even more important to build your pot, thereby ensuring you've got as much as possible by the time you come to retire.

Start the process by making sure you're signed up to your workplace pension scheme
– if your workplace doesn't have one yet, automatic enrolment means it soon will – and save as much as you can into it. You may want to look into other savings vehicles too, such as an ISA or the new Lifetime ISA variant, and when the time comes to retire, make absolutely certain you get the right advice. That way, whether you opt for an annuity or anything else, you can be sure you've got the best retirement income possible.

* Pension fund figures as at 1 July 2017 (based on a gross monthly premium of £100) and based on the average of all available pension funds. Source: Lipper.

** Annuity figures based on a male annuitant aged 65 buying a standard 'level without guarantee' annuity. Source: Moneyfacts.


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