Retiring soon? Financial crisis has cut your pension income by 46%

When glancing at a chart of the performance of equity markets over the decade since 2007, the steep falls endured during the financial crisis now look less painful, given the subsequent recovery that has taken place over the past eight years.

March 2009 marked the trough for the FTSE 100 index, when it hit a low of around 3500 points. Brave, or perhaps more accurately lucky, investors who bought a simple tracker fund back then will have at least doubled their money, given that the index is currently trading above 7300.

Not everyone, however, has been a winner. Those who sought refuge in cash during the crisis and remained on the sidelines during the subsequent recovery will have seen the value of their money fall in real terms, due to the effects of inflation

Whether you are a winner or loser also depends on whether you are investing for the future or were living off your investments during the crisis. ‘For those investors in accumulation, risk assets have been the right place to be,’ notes Anthony Gillham, who runs various multi-asset funds for Old Mutual.

‘But what is less talked about is the devastating compounding effect that bear markets have on investors in drawdown who are relying on income from the stock market to supplement their lifestyle at retirement – those in this camp are among the losers.’ 

In addition, as research by Fidelity International reveals, individuals who are retiring today and converting their pension pot into a guaranteed income for life – an annuity – will receive pension income 46 per cent lower than could have been expected had they retired immediately before the credit crunch.
 
According to Fidelity, this hidden squeeze on pension incomes represents the combined effect of real-terms fall in wages, lower market returns and steep declines in annuity rates.
 
Fidelity modelled the outcomes of someone retiring on a defined contribution pension today, who in 2007 still had ten years of work and saving ahead of them. At the end of the period 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.

The results, outlined in the table below, show that by all measures those retiring today are worse off, compared to their counterparts retiring a decade previously.  

 1997-2007   2007-2017

Salary at start of period:

£45,000

£45,000

Salary at end of period:

£63,242

£53,220

Annualised CPI inflation in period:

2.60%

2.70%

Pension pot at start of period:

£50,000

£50,000

Pension pot at end of period:

£180,106

£139,110

Income from average annuity based on pension pot:

£12,193

£6,607

Replacement rate*

19.3%

12.4%

*Replacement rate shows annuity income as a percentage of pre-retirement salary
 
Ed Monk, associate director at personal investing for Fidelity International, says: ‘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.’

Meanwhile, however, figures from the Office for National Statistics show household income for retired households has been rising much faster than that for working families

Fidelity points out that these latter statistics cover all income for retirees. ‘Most - at this stage - will consist of generous defined benefit schemes as well as the generous state pension (triple lock) kicking in. Defined contribution pensions and private savings are included too, but they are just one element,’ says a spokesperson.
 


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