UK Retirement Incomes Still 27% Lower than 2008 Financial Crisis Levels

By: MoneyFacts

Key findings:

• Record personal pension membership and contributions mask significantly lower retirement incomes than at the height of the 2008 financial crisis

• Pension fund performance continued to weaken in Q3 2017

• Annuity uncertainty still impacting pricing with the income gap between the most competitive and least competitive open market annuities now at a record low

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.

New 2015/16 estimates from HMRC show that personal pension contributions have now surpassed their 2007/08 peak, while personal pension membership is also at a record high. However, the latest Moneyfacts UK Personal Pension Trends Treasury Report found that today’s retirees are still receiving significantly less retirement income than similar individuals who retired at the height of the financial crisis in October 2008. The average retirement income based on a male contributing £100 per month into the average pension fund over a 20-year period and retiring 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 2017. This is 27% lower than the equivalent retirement income of £3,004 in October 2008 at the height of the financial crisis.

Richard Eagling, Head of Pensions at Moneyfacts, said:

“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. 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.”

Pension fund performance: weaker growth

The Moneyfacts report found that pension fund growth continued to slow during Q3 2017, with the average pension fund delivering returns of just 0.9%. This compares with average growth of 4% in Q1 2017 and 1.4% in Q2 2017. Returns for Q3 2017 would have been higher but for a difficult September 2017, in which the average pension fund fell by 1.5%. Highlighting the more challenging economic conditions faced by pension funds is the fact that a third of the surveyed funds (33%) failed to deliver growth in Q3 2017, up from 29% in Q2 2017.

Annuities: verging on the inadequate

The report also revealed how the uncertainty that still surrounds the annuity market and volatile gilt yields are impacting annuity rates. Annuity pricing trends in Q3 2017 proved to be far from homogeneous, with some wide variations in pricing strategies depending upon the type of annuity and options chosen, and the purchase price.

Overall, across all annuity types (standard and enhanced) the average annual annuity income based on a 65-year-old fell by 0.2% at the £10K purchase price but increased by 1% at the higher £50K purchase price.

Richard Eagling, Head of Pensions at Moneyfacts, said:

“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. 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.”

* 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.

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