Crisis is an overused word — especially in the last couple of years in relation to the global recession.
But crisis is the best word to describe the financial situation facing most people who plan to retire in the next few years.
Several reports have just been published reviewing the current pensions environment — and each presents a similar picture of pensioners who will be forced to accept a severe drop in living standards after they cease earning their wages.
Investments have performed terribly in the last decade because of the banking collapse, property crisis, related recession and the earlier dot-com crash. Inevitably this means that personal pensions for those about to retire have performed much less well than people would have expected when they took out their pension plans.
A personal pension in which £100 was invested monthly for 20 years would have matured a decade ago with a pay-out of £103,914. But today the same policy would produce on retirement a mere £40,749, according to analysis just published by Investment Life & Pensions Moneyfacts.
The situation is made even worse by the impact of current market conditions on annuity rates, which determine the regular payment a person receives in retirement from their personal or company pension. Low gilt yields and longer life expectancy have caused a serious drop in annuity rates — they are down 28% in the last decade.
72% smaller pension
The combined impact of these trends is very serious. The £100 a month pension plan maturing 10 years ago would have generated an annual retirement income of £9,000: that income now would be a mere £2,500 — or 72% less than a decade ago. To reproduce the pension income of a decade ago, monthly contributions would now have to jump to £355.
“Although these figures do little to inspire confidence, they at least serve as a powerful reminder of the investment risks inherent in saving via a defined contribution pension,” said Richard Eagling, editor of Investment Life & Pensions Moneyfacts.
“It is clear from such alarming statistics that if the pensioners of tomorrow are to enjoy the same level of retirement as their predecessors, much has to change and quickly.”
Instead, things look to get even worse. Annuity rates could fall by a further 30% from 2012, according to advisors Annuity Direct. It says that new European legislation will force life companies to pay-out less when they become required to make more conservative assessments of potential liabilities.
Not surprisingly, these figures mean that a large proportion of people now coming up to retirement have not saved anything like enough. Worse still, the severe impact of the recession means that many people have completely stopped saving — no doubt partly inspired by the low rates earned by savings at present.
A report just published by life company Aviva reveals that 40% of people aged 55 to 64 are saving nothing. Worse still, a fifth of this age group owes more than £75,000 on their mortgage. In fact, pre-retirers have the highest average balances outstanding on their mortgages and the lowest savings of any age group.
1 in 5 rely on state pension
The findings from Aviva’s research are backed-up by those from another life company, Prudential. Almost a fifth of people retiring this year will have no employer or personal pension or savings to top-up their state pension. The basic state pension pays only £95.25 per week, while that for a married couple is £152.30. That compares poorly with average spending by a person aged 65 to 75 of £321 per week.
“Given that so many people expect to retire on the basic state pension, particularly when only half know how much it pays, there is still a clear need for people to understand the consequences of not making adequate provision for their retirement,” says Martyn Bogira, director of defined contribution solutions at Prudential.
The Pensions Policy Institute agrees that an increasing number of retired people will find themselves as pensioners without the financial means to have the standard of living that they are used to, or expect. Younger people who can still do something to increase their pension provision should consider the problems afflicting those about to retire.
“Many people will need to contribute more to their pension during working life, work longer, or run down savings, investments or housing wealth to achieve a standard of living in retirement they might consider acceptable,” says Chris Curry, research director of the Pensions Policy Institute.