Thanks to high charges and poor investment performance, personal pension payouts have nose-dived. Here's how bad things are.
According to a new survey from Moneyfacts, returns from personal pensions have plummeted over the last decade.
Every worker knows how important it is to save for retirement, partly because the UK's aging population is placing an ever-greater strain on the State pension system. In an ideal world, we'd all be members of low-cost or no-cost company pension plans, with our employers chipping in extra money on top of our personal contributions. Alas, this world is far from ideal, so millions of us must plan for retirement by paying into our own personal or stakeholder pensions.
Sadly, taking sensible steps to save for a comfortable retirement has proved to be a shaky step over the last decade, thanks to falling returns from personal pensions. Indeed, the research found that an individual retiring today could have a personal-pension pot worth less than half that of someone who retired ten years previously, despite the stock-market revival of the past three years.
Here's how the figures stack up:
1) Average with-profits personal pension maturity values, July 1996 versus July 2006
(based on a gross contribution of £500 a year)
5 years (£) | 10 years (£) | 15 years (£) | 20 years (£) | 25 years (£) | |
|---|---|---|---|---|---|
Amount paid in | 2,500 | 5,000 | 7,500 | 10,000 | 12,500 |
July 1996 | 2,942 | 9,404 | 25,840 | 61,592 | 120,239 |
July 2006 | 2,977 | 6,080 | 12,306 | 26,168 | 55,992 |
Difference | +1% | -35% | -52% | -58% | -53% |
So, as you can see, someone retiring this year after saving £500 a year for 25 years would have a final pot worth over £64,000 less than someone who paid identical annual contributions but retired a decade ago. Talk about bad luck!
2) Average unit-linked personal pension maturity values, July 1996 versus July 2006
(based on a gross contribution of £500 a year)
5 years (£) | 10 years (£) | 15 years (£) | |
|---|---|---|---|
Amount paid in | 2,500 | 5,000 | 7,500 |
July 1996 | 3,196 | 8,119 | 19,709 |
July 2006 | 3,125 | 5,972 | 11,696 |
Difference | -2% | -26% | -41% |
Although unit-linked pensions have fared slightly better than with-profits funds have (down only 41% at the fifteen-year mark, compared to -52%), they have produced smaller pension pots for investors over ten and fifteen years. Hence, despite widespread criticism of with-profits funds, they continue to hold their own against their opposition.
Now for the double whammy: not only have pension investment returns dived, but so have annuity rates. (An annuity is an income paid to you for life by an insurance company, in return for a lump sum which you forfeit when you hand it over, regardless of how long you live for.)
In July 1996, a pension fund worth £100,000 would have bought a 65-year-old man an annuity of £11,390 a year, if he chose the best available level, without-guarantee, standard annuity. Today, this annual income would be a mere £6,860, which is a fall of two-fifths (40%).
Thus, put these two trends together and you come up with the following results:
1) £500 a year for 25 years in the average with-profits pension would have produced a pot worth £120,239 in July 1996, which would buy an annuity of £13,695 a year.
2) Identical contributions into a pension maturing in July 2006 would have produced a pot worth £55,992, which would buy an annual annuity of £3,841. This is almost £10,000 a year less than in the above scenario, which equates to a fall of more than seven-tenths (72%)!
No wonder traditional personal pensions are desperately out of fashion, while tens of thousands of investors rush to set up low-cost Self-invested Personal Pensions (Sipps)!
Still, things could have been worse: the average pension fund grew by over 14% in the past twelve months, plus 13% a year in the previous two years. Without the bounce-back from stock-market lows in March 2003, the above falls would have been even steeper.
Still, on a lighter note, it's far better to invest than not to invest. Thanks to longer lifespans, future pensioners are facing a longer retirement, and the only way to fund these extra earnings-free years is by stashing away money during their working lives. If you want a comfortable retirement, it's up to you to plan and manage your finances accordingly. Don't expect much help from the State or your employer, because you're almost on your own on this one!
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