Pension incomes hit by significant decline

11 February 2010

Retirement incomes have seen a sharp fall over the past ten years, a new study has revealed.

The research, carried out by Moneyfacts, the financial information organisation, found that the worth of an average pension fund on its maturity has dropped by 60 per cent since 2000.

Taking an average contribution of £100 a month to a managed pension fund over a 20-year period, someone who retired in 2000 would have enjoyed a pot valued at £103,914. For someone retiring today, the value of the same pension fund is £40,749, the survey claimed.

A major reason for the decline is the succession of economic uncertainties experienced during the past few years, from the dotcom crash to the credit crunch to the recession.

Pension savers could have been even more penurious now were it not for the fact that the world's stock markets showed some signs of improvement during 2009 when the average pension fund rose in value by 22.3 per cent, the best increase in annual returns for a decade.

Moneyfacts, however, pointed out that those approaching retirement have to face a further problem on top of the falling worth of their pension funds.

Most people use their funds to purchase an annuity which will offer them a regular sum of money each year for the length of their retirements.

Annuities, though, have also seen a decline. In 2000, a £10,000 fund would have secured annuity payments of £866 annually; the same fund today would provide only £624, a fall of 28 per cent.

Taking the devaluation of both funds and annuities into account, Moneyfacts calculated that, on average, and assuming 20 years of monthly contributions of £100, a standard annuity and a retirement age of 65, retirement income has suffered a 72 per cent drop in ten years.

In other words, to equal the income of a retiree in 2000, someone now would need to be saving as much as £355 a month rather than £100.

Richard Eagling, editor of Investment Life and Pensions at Moneyfacts, said: "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. 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.

"Unless individuals increase their contributions and take greater interest in the returns generated, the next decade could prove just as disappointing."