Pension incomes decline by 70% Investment returns and annuity rates plummet

10 February 2010

A file showing a pensions document

People hoping to fund a comfortable retirement face a steep uphill struggle, according to new statistics.

The average personal pension pot has declined in value by 60% over the past decade, says specialist publication Investment Life & Pensions Moneyfacts. A person who retired now after paying £100 gross into a pension for 20 years would have built up a pension fund worth £63,000 less than if they’d stopped working 10 years ago.

The dotcom crash and credit crisis have both badly affected the performance of pension funds according to Richard Eagling, the magazine’s editor. He commented: ‘It is hardly surprising that pension funds have performed so poorly. However, unless individuals increase their contributions and take greater interest in the returns generated, the next decade could prove just as disappointing.’

Annuity rates

For those nearing retirement, the problem of poorly performing pension funds is compounded by the continuing decline of annuity rates. According to Investment Life & Pensions Moneyfacts, a combination of falling gilt yields and improving mortality rates has weighed heavily on annuity values. 

Its research shows that the average level annuity rate for a 65 year old male has fallen by 28% since January 2000.

Consequently, pension income has fallen from £8,998 per year a decade ago to just £2,542 in January 2010 – a huge drop of 72%.

Planning your retirement

Which? Money editor James Daley said: ‘Pensioners have been hit by a double whammy over the past few years. First falling stock market returns have hit the value of their investments, and then falling annuity rates have slashed the amount of income they have been able to earn from their pension.

‘Keeping an eye on how your pension is performing and saving as much as you can are crucial if you’re to enjoy the standard of living you’d ideally like during your retirement. And if you're approaching retirement and looking to buy an annuity, it's more important than ever that you shop around. It's possible to get up to 30% more income than you're likely to be offered by your pension provider.’

The brand new Which? guide to Self invested personal pensions explains how opening a Sipp could help you take control of your pension savings, while our Planning your retirement guide explains how you can start preparing for your later years.

If you're considering purchasing an annuity, you can compare a range of options by reading our Annuities review, or find out more about how they work in the Annuities explained advice guide.