Current retirees have a pension income which is 46 percent lower than they could have expected if they retired immediately before the credit crunch, according to Fidelity International.
Research by the investment firm suggests that the ‘squeeze’ on pension incomes represents the “combined effect of a real-terms fall in wages, lower market returns and greatly reduced returns on annuities that pay retirement income in the decade since the credit crunch first emerged”.
Fidelity modelled the outcomes of someone retiring today who in 2007 still had a decade of work and saving ahead of them. At the end of the period in 2017, their pension pot was used to by an annuity at current market rates. The results were then compared to the outcome achieved had they experienced the conditions from the preceding decade (1997 to 2007).
The analysis found that on average, people retiring in 2007 earned wages which maintained their buying power, tracking 0.9 percentage points above Consumer Price Inflation (CPI). However, those in 2017 experienced the opposite, with wage growth running at 1.7 percent against CPI of 2.7 percent (a full percentage point under inflation).
In addition, lower earnings mean lower pension contributions, with those retiring in 2017 in Fidelity’s scenario paying in £5,179 less over ten years as a consequence. Teamed with less buoyant stock markets and plummeting annuity rates, Fidelity’s calculations show these people have a pot which is three quarters the size of pre-crisis retirees (£139,110 vs £180,106), with 46 percent the buying power when securing guaranteed income.
Associate director at personal investing for Fidelity International, Ed Monk, said: “This all makes grim reading for the 2017 cohort of retirees yet it’s important not to abandon hope. In the period since the crisis the pension freedoms reforms have freed many more people to access their pension pot using drawdown instead of an annuity.”
He added: “This comes with greater risk but at least provides an alternative to being locked into low paying annuities and gives you greater flexibility over how you manage your income. For those still with some years to go before they retire, there’s a chance to make more of the time available left to save.”
Mr Monk concluded: “Maximising contributions to take advantage of any employer contributions on offer as well as the help available from tax relief makes sense, as does ensuring your pension money is invested to take a level of risk that you’re comfortable with, but that will give you a chance of decent growth.”
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