A new report by Moneyfacts has revealed that while the total amount of money being saved into personal pensions may now have surpassed the pre-financial crisis high, the retirement incomes that are being delivered are still 27% lower than in 2008, so retirees continue to lose out in real terms.
According to estimates from HMRC, personal pension contributions surpassed their 2007/08 peak in the 2015/16 tax year, while personal pension membership is also at a record high. Yet while this initially sounds good news, the latest Moneyfacts UK Personal Pension Trends Treasury Report revealed that today's retirees are still receiving significantly less retirement income than those who retired at the height of the financial crisis in October 2008.
Calculations show that the average retirement income based on a male contributing £100 per month into the average pension fund over a 20-year period, who then retired at the age of 65 with a standard level without guarantee annuity, fell for the second consecutive quarter, from £2,229 in Q2 2017 to £2,202 in Q3. This is 27% lower than the equivalent retirement income of £3,004 in October 2008 at the height of the financial crisis, highlighting that there's still some way to go before retirement incomes truly recover.
The table below highlights this in more detail. As you can see, although the typical pension fund value has increased by 12% over the last nine years, average annuity rates have dropped considerably, which is having a significant impact on the retirement outcomes of those who still want a guaranteed income.
|Maturity date||Pension fund value*||Annuity rate per £10K**||Annual retirement income|
|1 October 2008||£42,622||£705||£3,004|
|1 October 2017||£47,877||£460||£2,202|
|Source: Moneyfacts UK Personal Pension Trends Treasury Report Q3 2017 |
* Pension fund figures as at 1 October 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.
"Although some of the headline figures recently released by HMRC paint a picture of a reinvigorated personal pension market, they mask two major concerns: low individual pension contributions and subdued retirement incomes," said Richard Eagling, head of Pensions at Moneyfacts. "With the retirement incomes being delivered by personal pensions and annuities significantly below the 2008 financial crisis levels, there is an urgent need for greater education and engagement to encourage individuals to make greater private pension provision.
"One of the biggest problems that individuals still face is understanding what is needed to deliver a good retirement income outcome, especially given the lack of official guidance. To this end, the Pensions and Lifetime Savings Association's recent proposal to create a set of Retirement Income Targets, similar to those being employed to good effect in Australia, seems to offer a sound rationale."
Unfortunately, the latest pattern may not change anytime soon, particularly with the finding that pension fund growth continued to slow between July and September, despite rising since 2008. The figures show that the average pension fund delivered returns of just 0.9% during the three-month period, driven by 33% of surveyed funds failing to deliver growth, and marks a slowdown from average growth of 4% in Q1 2017 and 1.4% in Q2.
The report also revealed that annuity rates are "verging on the inadequate", with the uncertainty that still surrounds the market and volatile gilt yields – key drivers of annuity rates – impacting the sector. This quarter saw wide variations in terms of pricing, and as a result, the average annual annuity income across all annuity types (standard and enhanced) based on a 65-year-old fell by 0.2% for those with a £10,000 pension pot, but increased by 1% at the higher £50,000 purchase price.
"One of the key questions that the Work and Pensions Committee is seeking to address in its recently-announced pension freedoms inquiry is whether an adequate annuity market is being sustained," added Richard. "It is still too early to say whether competition in the annuity market is now inadequate, but there are signs that it has weakened to such an extent that providers are reluctant to price themselves too far ahead of their rivals.
"In Q3 2017, the difference in the income payable between the most competitive and least competitive open market annuity narrowed markedly, from 13.9% to just 8%. This is the lowest level that we have ever recorded, surpassing the previous low of 8.3% at the time of the switch to gender neutral pricing in December 2012, which forced annuity providers to adopt ultra-cautious pricing."
So what does it all mean for you? Well, if you still want to benefit from a guaranteed income throughout retirement, yet don't want to settle for a paltry rate, comparing annuity rates on the open market is key. Use our no obligation annuity planning service to get started and see the kind of options available.
Alternatively, it may be worth considering alternative means of securing an income in retirement, such as income drawdown. There's a growing shift towards this kind of pension product as retirees seek more control over their income, so find out more about it here, as well as the risks involved, and see if it's worth considering.
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