MGM Advantage, who chart the annual income you will receive from a defined contribution deal, personal pension or stakeholder pension, announced this week that today's British pensioners are more than £14,000 worse off than similar workers who retired three years ago.
In all of the above pension deals you build up a pot of cash eventually using it to buy an annuity, which turns it into a monthly payment. The trouble is that the last three years have been a disaster for UK annuities.
In January 2010, the average annuity for a 65-year old British worker with a £50,000 pension pot would have paid an annual income of £3,495. Today that same pension pot would generate an annual income of £2,786, a reduction of 20%, or over an average retirement of 20 years, £14,180 less.
Annuity rates fell again by 2.5% in the last three months of 2012 - this means rates have dropped almost 12% in the last year and more than 21% since MGM started following annuity rates in August 2009. *
MGM Advantage said the falls were due to a combination of things, including the fact that returns from UK gilts (which annuity rates are linked to) are at historic lows and that people are living much longer.
The industry is also battling with a decision made by the European Courts in March last year for financial firms offering annuities, which are now not allowed to discriminate between women and men. Typically women live longer than men, so they get less every month, which is meant to mean that by the time they die they will have received the same total payout. However, the end result will mean much less generous pensions for men.
Companies will have to offer women and men the same amount each month, which means that women will receive more, but to pay for this, men will receive much less. Put simply men will see their annuity payouts fall and women will see their life insurance premiums rise. Women who are beneficiaries of joint life annuities purchased by their male partner will also be affected as they will end up with a lower income.
Dr Ros Altmann, director general of Saga said: “The worst affected are likely to be those with moderate amounts of pension savings, who do not have enough money to afford more flexible pension options but have saved more than the minimum £18,000 which would allow them to avoid buying an annuity… it is yet another devastating blow to people’s hopes of a comfortable retirement.”
Asked if there is anything more Saga can do, Dr Altmann said “There’s nothing we can do to change the rules. The Association of British Insurers has been battling with Europe over the issue for years, to no avail.”
As for Final Salary pension schemes, the Pension Protection Fund (PPF) reported last year that the UK’s final salary scheme sector aggregate deficit stood at £312.1bn, with a funding ratio of 76.8pc. Total assets were £1030.8bn and liabilities were £1,343bn. Any fall in gilt yields would be likely to exacerbate this deficit situation. **
The general consensus is that things aren't going to get any better in the immediate future either.
People will continue to live longer, and the market will have to get to grips with more European legislation which is meant to make businesses less risky, but will also make them more expensive to run - which will get passed onto consumers through worse annuity returns.
* Annuity rates are based on analysis of data from Investment Life and Pensions Moneyfacts by MGM Advantage (31 December 2012). The analysis looked at level annuities without a guarantee and income levels are based on a pension pot of £50,000 and a retirement age of 65. A gender neutral basis has been used for the first time for this Index release. To create total retirement income figures the Index multiplied annual annuity income by 20 years in the case of men and 24 years in the case of women. Ehanced rate figures are from a sample of smoker rates and enhanced rates based on health conditions. The Index based its life expectancy figures on Office of National Statistics figures.
** According to the PPF, a 0.1pc reduction in gilt yields increases scheme liabilities by 1.8pc. It only increases the value of scheme assets by 0.4pc.
Report by Ian Bell