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.
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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.
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.
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.
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.