This hidden squeeze on pension incomes is a result of the combined effects of a real-terms fall in wages, lower market returns and greatly reduced returns on annuities in the decade since the credit crunch first emerged.
Fidelity modelled the outcomes of someone retiring today who still had 10 years of work and saving ahead of them in 2007.
At the end of the period in 2017, their pension pot was used to buy an annuity at current market rates.
The results were then compared to the outcome achieved had they experienced the conditions of the preceding 10-year period, from 1997 to 2007.
The results show that, by all measures, those retiring now have suffered compared to their counterparts retiring a decade previously.
Breakdown
Effectively poorer
On average, people retiring in 2007 earned wages which maintained their buying power, tracking 0.9 percentage points above Consumer Price Inflation (CPI).
Meanwhile those in 2017 experienced the opposite with wage growth running at 1.7% against CPI of 2.7% – a full percentage point under inflation, effectively making them poorer.
Lower earnings mean lower pension contributions with those retiring in 2017 in our scenario paying in £5,179 ($6,665, €5,669) less over 10 years as a consequence.
Coupled with less buoyant stock markets and plummeting annuity rates, Fidelity International’s calculations show these people have a pot only three quarters the size of pre-crisis retirees – £139,110 vs £180,106 – and only 46% of the buying power when securing guaranteed income.
Grim reading
Ed Monk, associate director at personal investing for Fidelity International, 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.
“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.
“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,” Monk said.
