The Cost of a £5,000 p.a retirement income rises 29% #QROPS #Reasonstotransfer #IN
24 Wednesday Apr 2013
The amount of money a man of 65 needs to have accrued in his pension fund to buy a £5,000-a-year retirement income has increased by 29% in the past three years, according to official figures.
The Office for National Statistics says a man reaching state retirement age in March 2013 will need a pension pot worth £152,800 to buy an annuity paying out £5,000 for the rest of his life, up from £118,000 in December 2009. For women, who used to pay more for annuities because of their longer life expectancy but are now charged the same, the cost has increased by 14% from £133,500.
Annuities are contracts which pay a saver an income for life in exchange for their pension fund, and are sold by life insurance and pensions companies. The amount they pay – the annuity rate – has been falling for years as a result of rising life expectancy, but in recent years has been depressed further by low interest rates and the Bank of England’s quantitative easing programme.
The ONS figures, published in its Pensions Trends report, show that savers who want to achieve a larger retirement income have also seen big rises in the amount they need to have saved during their working life. To buy an inflation-linked retirement income of £25,000, less than the UK’s average salary, now takes a pension fund of £763,900. In December 2009 a man aged 65 needed to have saved £590,200 to achieve this, while a woman of the same age needed to have put by £667,700.
The ONS report also looked at typical levels of household savings in the UK, and where people are holding their cash. It noted: “Household retirement income can be sourced from any pension, financial or property savings that its occupants have built up during their lifetime.
“The adequacy of this saving for a household will depend on what level of expenditure they consider necessary for retirement. Different households will have different needs, which means that a standard or minimum requirement is hard to define.”
It showed that despite the onset of the financial crisis in 2007 the median total saving of all households headed by someone of working age had increased from £54,000 in 2006/08 to £79,200 2008/10 – the latest period for which figures were available.
The highest level of saving was in private pensions throughout, and the median value of money held in those funds went up from £30,000 to £53,000.
Households headed up by someone aged between 50 and 64 and approaching retirement had median savings of £195,600 in 2008/10, of which £135,200 was in a private pension. This would produce an annual income of just £4,421.
Tom McPhail, pensions expert at IFA Hargreaves Lansdown, said the big increase in the cost of buying a retirement income was significant and could lead to some retirees buying the wrong type of annuity.
“Most people approaching retirement have set their income expectations based on historical experience (if they have any), however with annuity rates at an all-time low these expectations are likely to be over-optimistic,” he said.
“There is a risk that because people haven’t saved enough they will look to maximise their income today at the expense of inflation proofing and death benefits for their spouse tomorrow.
“It is vital that investors shop around for the best possible terms, seeking out an enhanced annuity where they can, and considering the most appropriate shape of annuity for themselves and their dependents.”
Meanwhile, retail giant Tesco has said it will enter the annuity market through its website. The service, which will need approval from the Financial Conduct Authority before it can be launched, will allow customers to compare the income being offered by different providers.
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