Pension income falls by more than 70%

Older individuals will struggle to fund a comfortable retirement unless they dramatically increase their pension contributions, according to new research showing a dramatic fall in the value of these funds over the past decade.

New research from Life & Pensions Moneyfacts.co.uk revealed on Tuesday that the size of the average personal pensions pot has dropped by 60 per cent over the last decade. The group blamed the sharp fall in the value of pension savings on economic volatility, from the dot-com crash at the start of the decade to the credit crunch, and the longest recession in generations.

It is a situation that would have been even worse, had it not been for the recent stock market revival, which saw the average pension fund grow by more than 22 per cent in 2009, the highest annual return since 1999.

Annuities are used to convert a pension pot into an annual income for life, but a combination of falling gilt yields and increased life expectancy has led to a 28 per cent decline in their rates since 2000.

This has meant that a male contributing £100 gross per month into a balanced managed fund over a 20 year period and retiring at age 65 with a standard level without guarantee annuity will have seen his pension income fall from £8,998 per annum in January 2000 to just £2,542 in January 2010, a drop of £6,456 or almost 72 per cent.

The group estimates that people would have to more than triple the amount they set aside to achieve a similar income to the one they would have got 10 years earlier, raising their monthly contributions from £100 to £355.

”Although these figures do little to inspire confidence, they at least serve as a powerful reminder of the investment risks inherent in saving via a defined contribution pension,” said Richard Eagling, Editor of Investment Life & Pensions Moneyfacts.

”It is clear from such alarming statistics that if the pensioners of tomorrow are to enjoy the same level of retirement as their predecessors, much has to change, and quickly.”