Bristol & West Financial Services Pension News
People retiring this year are receiving 10% less than they did last year.
A double blow caused by dreadful annuity rates and poor investment returns!
- Smaller pension pots and falling annuity rates mean people are now retiring on nearly 10 per cent less income than a year ago, a new study reveals.
- Weaker investment returns have reduced the sums savers can gather together by the time they retire, while a worsening annuity market means they are getting lower quotes.
- The task facing people to secure a comfortable retirement income has never been harder, just a year on since new pension freedoms were introduced, according to comparison website Moneyfacts.
Its new research shows that someone who contributed £100 gross per month into an average personal pension fund over the past 20 years would have typically built up a pension fund of £42,470 if they were retiring now.
That compares with £45,946 if they had saved the same amount for 20 years up until retirement a year ago.
And if a saver chose to buy a standard annuity at today’s lower rates, they would receive an average annual retirement income of £1,983, compared with the £2,191 they could have got a year ago. See the table below.
The annuity rates have been falling for many years due to low interest rates and people living longer. The former means the return on UK Government bonds has dropped to historic lows, these are used to back annuities. The fact that annuities after pension freedom have become unpopular has meant that many providers have cut rates to help maintain their existing annuity business.
Moneyfacts previously reported that annuity rates were hacked back to all-time lows in 2015 due to three main factors:
1) Further falls in the yield from UK Government Bonds.
2) Reduced customer demand, which makes providers charge more to compensate for the loss.
3) New Europe-wide rules that mean annuity providers must hold more cash on their books rather than doling it out.
Moneyfacts said today that the annuity rate situation had deteriorated markedly since the start of the year and was the main driver of the fall in retirement income over this period.
Head of pensions Richard Eagling said: “The average annual income payable via a standard annuity has fallen by 4.6 per cent since the start of the year. This is already a big fall given the fact that the average annual annuity income only fell by 3.1 per cent during the whole of 2015.”
“In terms of the investment element of the equation the average pension fund is actually up slightly so far this year during the first quarter of 2016 at 1 per cent. However, over the last 12 months as a whole it is down by 2.3 per cent.”
Eagling went on: “The continuing fall in annuity rates is particularly disappointing as annuity sales are starting to revive as more retirees realise the importance of a secure regular income.”
“While pension freedoms have created more ways for individuals to access their pension pots, the real problem facing retirees is how to generate a suitable income. Unfortunately, there are still few products capable of helping retirees secure a reasonable retirement income, which was always one of the fundamental problems.”
“In fact, if anything, the new pension freedoms have proved counter-productive for retirees reluctant to take any risks with their pension pots as annuity providers have struggled to offer competitive pricing given the more limited business volumes at stake.”
WHY ARE ANNUITIES SO UNPOPULAR?
Buying an annuity means handing over your pension pot to purchase an insurance product that provides a guaranteed income until you die – there’s no chance of running out of money altogether.
Annuities used to be the main way people funded retirement, but they are now regarded as poor value and restrictive.
Returns are low after years of rock bottom interest rates and declining purchases. Meanwhile, many people don’t shop around for the best deal, or mistakenly buy unsuitable products that don’t take account of their health or provide for their spouse after death.
Sales of annuities plummeted after pension freedom was announced. Now, many more people are opting for income drawdown schemes which allow you to take sums out of your pension pot while the rest remains invested.
How income drawdown works?
You can choose to take up to 25% of your pension pot as a tax-free lump sum. You then move the rest into one or more funds that allow you to take an income at times to suit you. Most people use it to take a regular income. The income you receive may be adjusted periodically depending on the performance of your investments.
There are two main types of income drawdown product:
- capped drawdown – only available before 6 April 2015 and has limits on the income you can take out; if you are already in capped drawdown there are new rules about tax relief on future pension savings if you exceed your income cap
- flexi-access drawdown – introduced from April 2015, where there is no limit on how much income you can choose to take from your drawdown funds
Whatever you haven’t spent yet could still be growing, providing you get your investment decisions right. And if there is anything over when you die, tax changes make it easier to leave funds remaining in drawdown schemes to your children.
Annuity or Drawdown or a mix of both each person’s need is individual so we would always recommend taking advice.
Facts and figures source moneyfacts