New analysis of government figures by Standard Life, , highlights that the average retired couple has a pension income worth £284 per week – made up of both occupational and private pension income – excluding state pension income.
*Figures assume retirement at the age of 65 – with pension income made up of occupational and private pension income, and excluding the state pension (Figures are obtained by calculating the amount of money needed to buy an annuity that would provide a guaranteed income equivalent to each pensioner income level – using the Money Helper annuity tool)
** Figures assume retirement at the age of 65 – with pension income made up of occupational and private pension income, and excluding the state pension (Figures are obtained by calculating the amount of money needed to buy an annuity that would provide a guaranteed income equivalent to each pensioner income level – using the Money Helper annuity tool). Inflation measure is RPI.
Kudos to Standard Life for producing these numbers. They assume retirement at 65, which is odd as the state pension age is already 66 and moving to 67 shortly, but the point remains the same. The size of pot is now 25% smaller than it would have been at the start of the year, reflecting the increase in yields, interest rates and inflation. In short, there is some good news for those who were looking to buy an annuity in Q3 2022.
What the article doesn’t say is that over the period , a typical “de-risked” pension pot, life styled into 15 year gilts, would have fallen by around 25%.
Ah gilts – my pension provider decided that as I was nearing retirement they’d put the majority of my fund into “safe” 15yr Gilts. I retired last August. Since then my DC fund has lost over 25% in value thanks to the fall in gilts.
— 💙 Living with Covid doesn’t mean ignoring it (@Davrobin) September 23, 2022
Just as occupational schemes are finding, the cost of securing pensions through buying an annuity has fallen but so has the means to pay for it and this is where Standard Life’s numbers are a little less comforting.
Inflation
And just as people wake up to the nice idea of a wage for life, they need to think of whether they want to plan for what might be the last third of their life knowing that every announcement of inflation in the 30+ years to come will mean a real cut in income – unless they peg their annuity to RPI.
We now learn that the cost of an RPI annuity at 65 is £432,000.
I haven’t got the range of pot sizes in the Standard Life ( or better still the Phoenix Group’s Portfolio, but based on an average pot of £36,000, that’s more than 12 times the average DC pot. Even if we assume that couples have equal pension savings, that still means more than 6 times what each person in the couple is likely to have in a pot.
Which of course tells us that the vast majority of people’s private pension wealth is still in occupational DB schemes and it also tells us that if you haven’t got a DB pension, then providing yourself with average income (on top of the state pension) means you need a pot multiple times bigger than you currently have.
Which isn’t much of a help if your pot has fallen in value in 2022.
Couples
Now let’s turn to just what these numbers represent, they show what a couple reaching 65 needs, which is a household number. Many households aren’t populated by couples , but by single people. This is increasingly the case – not least because divorce rates for those over 50 are rising sharply
So while most households still have two adults in them, an increasing number are going to have to find these kind of pension pots (or pensions) from a single person.
We know (mostly from Scottish Widows) that there is a big pension gender gap with men having considerably more private pension wealth than women. What these figures also tell us is just how vulnerable women are within long term partnerships, the cost of “going it alone” for a woman is even higher than for a man.
The household costs for single people are not half than for couples. A lifetime on your own is not just a prospect of loneliness.
What are Standard Life getting at?
By the time anyone has household pension pot wealth of over £200,000, they will be (and certainly should be) taking professional advice, primarily from a financial adviser.
I suspect that Standard Life aren’t really talking to 65 year old couples as the people who advise them. And the message is simple, if you want to salvage anything out of the mess that de risking has made of your client’s pensions; or if you want to capitalise on whatever strategy your client has opted for in the past twelve months – that’s worked; think of buying an annuity now.
And if your client is now aware of the ravages that inflation can make of static household income, start thinking of buying an inflation linked annuity.
Alternatively..
Standard Life may be pointing out to people currently drawing down 8% of their income (the average non-advised drawdown) that even with the uplift that has happened because of the cost of living increases this year, 8% is way higher than the risk free annuity rate for level pensions, let alone pensions linked to inflation.
The sad truth is that most of us are having to draw down a higher percentage of a depleted pot , just to project the same income as we thought we might get 12 months ago.
Which means we are exposed to huge drawdown risks (pounds cost ravaging) , risks that could deplete our pensions to nothing well before we become nothing.
The need for something better
Whatever the investment pathway you are on, whether it is a pathway devised by your adviser, your pension scheme or you, the chances are that you aren’t feeling great about your pension pot. Standard Life are providing you with a silver lining.
But the bottom line, is that the expectations of private income from an annuity are still way below what most households need to preserve a pre-retirement income.
Without the help of occupational DB income, most savers are going to need much bigger pots than they currently have to have comparable incomes in the future , to what people have at 65 today.
To my mind , the case for a product that provides greater income than a guaranteed income without the uncertainty of drawdown has never been stronger.
or indeed annuity purchase
For some time (about 50 years) I have been advocating that outcomes are the main objective NOT the commission bashing, Equitable Life loving mantra. of “guidance” that just encourages and forgives procrastination
Advice needs to start with the first contribution otherwise £200,000 pots don’t happen. It takes salesmanship and education to achieve an Agewage Score of 100
The individual needs to be taught the merits of deferred gratification
The indexed increasing living wage might be a suitable target at £11.95ph and 38 hours the Standard Life survey show that the present education on pensions only provides 62% of a living wage. Using Q Ratios might also tell you when to be out of markets. or at least what rate of return to expect before costs and inflation
Productivity NOT GDP is what the country needs. Borrowing to consume is the road to financial ruin be it individual or country
Productivity growth is slow and painful, there is nothing wrong with borrowing, if it is done in a good manner. However, when excesses are made, or when everyone starts deleveraging at the same time, we will have cycles.
Cycles are good too, it cleans the private sector from “zombies” companies, and give some people a fresh start (although they cannot borrow for a while).
For so long, we had new start-ups making huge loses and just raising more capital, as cost of capital was low. Now investors will start to request earnings to be shown for new capital requests.
If clients money were managed well, avoiding fixed interest (the main bubble), and buying equities with earnings: energy, oil and gas, utilities, healthcare, consumer staples, eventually shorting the market a little, they would not be affected – real assets will recover sooner or later!
Ideally we need austerity, a recession, lower inflation and a fresh start. However, politicians want to be re-elected and peddle “growth stories”, and we will have stagflation, the worst of the two.
Michael Lipper suggested the following options earlier today. However, he did not take account of jurisdiction, taxation or currency. With incomplete data this reduces the chance of an optimum solution. The UK pensions industry operates in a vacuum and that model was broken after WW2 and repression helped to pay off the debt
Outlook
There are four possible paths forward. In order of time magnitude and pain they probability are:
A bear market without a recession has happened a few times and is largely a price correction. We are closing in on that.
A cyclical recession is usually driven by commodity prices or other supply issues. This is satisfactorily addressed in a few years.
A structural recession due to systemic imbalances of power and leadership require major changes, which drastically alter society. Depending on on the level of violence, it can take many years.
Stagflation, where a portion of the society/economy sacrifices involuntarily to the other until there is a counter-revolutionary force. There is usually a period of mismanagement and legal turmoil. We have experienced two periods like this in the past beginning in the 1930s and 1970s.
Each alternative is possible. Prudent investors should make up their own minds as to what is probable for their beneficiaries and careers.
@J Mather
We had a recession in 2020. It was a short and cyclical one.
Now we are heading towards a stagflation, unless Central banks keep raising interest rates until break the back of inflation. In the U.S. the rate of inflation for services (after taking away the increase in commodities) remains high, around 6.5%.
It is unlikely that FED would bring inflation under control without a recession. It should be cyclical (commodities will head down – Oil prices is already going that way), but it could have some structural issues as well. I think the U.S. is in it with a chance, but for UK I am not that positive – more likely a painful stagflation to come. Auto-inflicted most of it.
The cycles are much longer than the attention span of most managers
The destiny was set some years ago accelerated by the stupidity of Brexit and the last Friday comedy of errors