Thinking to retire this year? You might need to reconsider – retirement income hits a new low!
2012 turned out to be another poor year for annuity rates which resulted in a high volume of repricings amongst annuity providers throughout the year. Pensioners have now lost thousands of pounds in recent years as a result of decreasing annuity rates as well as the combination of high living costs and low returns on their savings. In fact, if you are considering to retire this year, then you’ll be £3,400 worse off than if you were to have stopped working five years ago. The drop was even steeper if we take inflation into account. For example, the average person who retired last year was £5,900 worse off in real terms on annual basis than a worker who retired in 2008.
If we look at the general statistics, the average working person today expects to get some £15,300. Many potential retirees will be impacted as their pension now buys a much smaller annuity than it used to despite actually saving the same amount of money. These news will come as a big disappointment to those who have delayed their retirement hoping they will be better off when they finally give up work. This will mean that many older workers will be forced to continue working in order to supplement and try to increase their reduced retirement income.
Why such a dire situation you might ask? Rounds of quantitative easing trying to resuscitate falling economy have been partially blamed for sharp falls in annuity rates, resulting in thousands of pounds being wiped off the new pensioners’ incomes. To explain the technical side, when quantitative easing takes place, it pushes down the yield on government bonds, which makes it cheaper for companies to borrow but at the same time it also reduces annuity and new retirees’ incomes.
It might yet get worse…Potential revisions to the way the Retail Price Index (RPI) is calculated may cut retirement income further as well as subsequently cause more people to continue working for longer. To demonstrate this potential effect, one of the best RPI-linked annuities on the market on 3 January paid £3,663 a year to a 65-year-old (based on a £100,000 total sum, five-year guaranteed annuity). If the expected change to the RPI calculation were to take place, the recipient would be some £9,500 worse off over the duration of the 20 year period.
It is not all bad news however. Following the new gender equalisation rules for Europe which came in effect on 21 Dec 2012, women are now able to reach a retirement income nearly 3pc higher and can finally benefit from equal payment rates with men. Beforehand, women were subject to lower rates due to average statistics of them living longer.
So is it now an equal playing field? Not so much as it turns out. Men’s pension annuity payments actually plunged at the steepest rate in 14 years. The average income per year from a standard annuity for a 65 year old male decreased by 11.5pc last year, according to research published by Moneyfacts.
And is it all doom and gloom across the entire country? What about the geographic distribution of projected pension income? Not surprisingly across the UK there is a £5700 annual expected income difference between various regions. Londoners are the best of the lot expecting to retire on an annual income of around £18,200 this year while pensioners in the West Midlands are the most worse off anticipating to receive closer to £12,500.
So what can be done, how can you try to secure the highest pension income in your respective situation? We always emphasise for those in active jobs to start saving as much as possible and also as early as possible. This will give you the best chance of building up a reasonable pension sum to help secure a comfortable retirement. Additionally, there are also various pension products that can assist in building up a good pension situation for you to enjoy.
We are happy to assist. Ask us how you can achieve the most efficient solution in your retirement income planning here!