24 Apr 2024

Pension incomes climb to 2½ year high

New research by Investment Life & Pensions Moneyfacts has revealed that average retirement incomes have increased steadily since the start of 2011 and now stand at a 2½ year high.

The increase in retirement incomes comes on the back of a combination of improving personal pension fund performance and higher pension annuity rates.

Improving pension fund performance
In terms of performance, pension funds have made a steady start to 2011 having posted average returns of 13.83% in 2010, their second successive year of double digit growth.

These gains have continued into 2011, with the average Mixed Investment 40%-85% Shares pension fund (formerly known as balanced managed funds) up by 4% since December 2010. According to the survey someone who had paid £100 gross per month into a Mixed Investment 40%-85% Shares pension fund for 20 years would have built up a pension fund of £41,964 if they retired now, compared with just £40,343 in December 2010.

Higher pension annuities
When it comes to assessing the extent to which retirement incomes have changed studying the size of an individual’s accumulated pension pot is, of course, only half the equation. In order to gain a full understanding of the plight facing today’s retirees, it is also necessary to consider the level of income that an annuity can purchase.

The encouraging news is that the uplift in retirement incomes afforded by improving personal pension returns has been heightened by a significant rise in annuity rates. The pension annuity rate rally which began back in November 2010 has continued to gain momentum. Average annuity rates increased for the sixth consecutive month in April 2011, the first time that has happened since August 2008.

Since the beginning of 2011 average income for a male aged 65 purchasing the most popular type of standard pension annuity (single life, level without guarantee) has increased by 3.6% from £607 per annum to £629 per annum (based on a £10K purchase price). The average annuity income for an equivalent female has increased by 3.7%, rising from £568 per annum to £589 per annum. Average pension annuity rates are now at their highest point since October 2009.

Historic trends – 80% decline since 1996
Although the trend towards rising retirement incomes will be welcomed by personal pension savers, the latest figures remain a shadow of their former selves. A decade ago, back in May 2001 the same individual would have received an annual income almost 60% higher at £6,496, whilst fifteen years ago the average retirement income was 80% higher at £13,327 per annum.

Richard Eagling Editor of Investment Life & Pensions Moneyfacts said:

“Given the headache high inflation is currently posing, the fact that annual retirement incomes have been rising since the turn of the year will at least offer a crumb of comfort for those on the verge of retirement.

“Much of this recent increase is due to higher annuity rates, a trend that is unlikely to persist in the long term. Sadly, the recent uplift in average retirement income may ultimately prove to be little more than a temporary respite in the uphill battle to secure a comfortable retirement.”

Table 1: Average pension income May 1996 - May 2011
Pension fund figures as at 1 May (based on a gross monthly premium of £100), source: Lipper. Annuity figures based on a male annuitant aged 65 buying a standard ‘level without guarantee’ annuity .

Maturity date	Average Pension fund value	Annuity rate per £10K	Annual retirement income
May 1996	£122,049	£1,092	£13,327
May 2001	£76,794	£846	£6,496
May 2002	£59,959	£792	£4,748
May 2003	£44,090	£702	£3,095
May 2004	£46,374	£698	£3,236
May 2005	£44,785	£675	£3,022
May 2006	£51,824	£660	£3,420
May 2007	£51,458	£682	£3,509
May 2008	£46,151	£704	£3,249
May 2009	£34,736	£644	£2,236
May 2010	£41,824	£620	£2,593
May 2011	£41,964	£629	£2,639
One year change	0.3%	1.4%	1.7%
Ten year change	-45.3%	-25.6%	-59.3%
Fifteen year change	-65.6%	-42.3%	-80.1%
Source: Moneyfacts.co.uk 24.5.11

Table 1 highlights the impact that a combination of the two factors has had on average pension income for a male contributing £100 gross per month into a Mixed Investment 40%-85% Shares pension fund over a 20 year period and retiring at age 65 with a standard level without guarantee annuity. Today this scenario would provide an annual income of £2,639, an increase of 1.7% on the annual income of £2,593 reported twelve months ago, and an increase of 18% on the annual income of £2,236 in May 2009. It is also the highest level of annual retirement income recorded since October 2008.

Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.

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