The credit crunch may be over but it continues to inflict a hidden squeeze on pension incomes years later, new research has found.
People retiring today have pension incomes 46% lower than would have been expected had they retired immediately before the credit crunch, analysis by Fidelity International revealed.
The hidden squeeze on pension incomes is the combined effect of a real-terms fall in wages, lower market returns and sharply reduced returns on annuities that pay retirement income in the decade since the credit crunch first emerged.
Investment manager Fidelity modelled the outcomes of someone retiring today who in 2007 had ten years of work and saving ahead of them.
At the end of the period in the 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 from the preceding 10-year period, from 1997 to 2007.
On average, people retiring in 2007 earned wages that 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 this scenario paying in £5,179 less over ten years as a consequence.
Coupled with less buoyant stock markets and plummeting annuity rates, calculations show these people have a pot only three quarters the size of pre-crisis retirees – £139,110 compared with £180,106 – and with only 46% of the buying power when securing guaranteed income.
Ed Monk, personal investing associate director at Fidelity, 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.”
He added: “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.”
©2017 funds europe
