UK Retirement Incomes Hit 33-month High as Record Numbers Turn to Personal Pensions

By: MoneyFacts

Key findings:

· Average retirement incomes increased by 5.2% in Q1 2017 and have risen by almost 15% over the last year. They are now at their highest level since July 2014.

· Retirement incomes have been boosted by strong pension fund returns and generally higher annuity rates.

· The uplift comes at a time when personal pension membership and contributions are at record highs.

A new report by Moneyfacts has revealed an ongoing improvement in retirement incomes at a time when HMRC statistics show that personal pension membership and contributions are at record highs.

The new research, contained in the Moneyfacts Personal Pension and Annuity Trends Treasury Report, found that for the second quarter running the average retirement income for an individual saving into a personal pension and then taking an income through an annuity has increased, rising by 5.2% during Q1 2017.

The report assessed the impact of the changing value of personal pension pots and annuity rates on retirement incomes. The figures are based on an individual contributing £100 gross per month into an average personal pension fund over a 20-year period and retiring at the age of 65 with a standard level without guarantee annuity. Table 1 shows that someone who had paid £100 gross per month into an average personal pension fund for the preceding 20 years would have built up a pension fund of £47,864 if they retired now, compared with £42,457 if they had retired in April 2016. When this pension pot is converted into an annuity, it equates to an average annual retirement income of £2,273 today compared with £2,159 in Q4 2016 and £1,983 in Q1 2016. Consequently, the average retirement income has risen by 14.6% over the last year and is at its highest level since July 2014.

Table 1: Average retirement income April 2016 - April 2017

Pension fund figures as at 1 April 2017 (based on a gross monthly premium of £100) and based on the average of all available pension funds. Source: Lipper. Annuity figures based on a male annuitant aged 65 buying a standard ‘level without guarantee’ annuity. Source: Moneyfacts.

The report found that a combination of strong recent pension fund returns and generally higher annuity rates has boosted retirement incomes. The average annual income payable from a standard level without guarantee annuity for a 65-year-old increased by between 0.4% and 2.3% in Q1 2017 (depending on purchase price), while the average pension fund delivered a return of 4%. Overall, 95% of all pension funds delivered positive growth in Q1 2017, with 6% of these posting double-digit growth.

Richard Eagling, Head of Pensions at Moneyfacts, said: “The record numbers saving into personal pensions and defined contribution pension schemes have placed even greater importance on the ability of funds to deliver strong performance if individuals are to generate an adequate retirement income. The fact that the average pension fund has now delivered positive returns in every calendar year since 2012 has arguably made it easier for individuals to accept the investment risks inherent in the defined contribution pension model than might otherwise have been the case. Whether the recent enthusiasm for personal pensions and the low opt-out rates for auto-enrolment will continue should we see a sustained period of falling investment returns remains to be seen.”

The Moneyfacts Personal Pension and Annuity Trends Treasury Report, out later this month, provides a comprehensive review of the UK personal pension and annuity sectors, with detailed analysis of annuity rates, pension fund returns and maturity values.

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