Shocking figures have been released today showing that today's pensioners are more than £14,000 worse off than someone in exactly their position retiring three years ago. Even more alarmingly, the decline of pensions is far from over, and those set to retire soon could get an even smaller pension.
So what's going on?
DeclineThe figures come from MGM Advantage, which charts the annual income you will receive from your pension if you have a defined contribution deal, personal pension or stakeholder pension.
In all of these circumstances you build up a pot of cash and will usually use it to buy an annuity, to turn it into a monthly payment. The trouble is that the last three years have been a disaster for annuities.
Annuity rates fell again by 2.5% in the last three months of 2012 - this means rates have dropped almost 12% in the last year and more than 21% since MGM started following annuity rates in August 2009.
In January 2010, the average annuity for a 65-year old with a £50,000 pension pot would have paid an annual income of £3,495. Today that same pension pot would generate an annual income of £2,786, a reduction of 20%, or over an average retirement of 20 years, £14,180 less.
Why?Aston Goodey, distribution and marketing director at MGM Advantage said the falls were due to a combination of things, including the fact that returns from UK gilts (which annuity rates are linked to) are at historic lows, that people are living much longer, and that the industry is battling with the European ruling which means that rates have to be the same for both men and women.
He added that things aren't going to get any better in the immediate future either, as people will continue to live longer, and the market will have to get to grips with more European legislation which is meant to make businesses less risky, but will also make them more expensive to run - which will get passed onto consumers through worse annuity returns.
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What can you do?Goodey comments: "With annuity rates so low people will be wondering if they have any options. It is hugely important that you shop around for the best deal to make the most of your pension. You should consider all of the options available at retirement rather than be short-changed by your holding pension provider."
If you are willing to accept more risk you could consider an investment-linked annuity - although these are definitely not suitable for everyone as they could see your income fall if investments do poorly.
Other options include enhanced annuities, which take health and lifestyle into account, and can increase the annuity income by as much as 30% or more. Goodey adds: "With up to 70% of the population potentially qualifying for a better rate due to health or lifestyle factors, seeking financial advice is crucial."