Your pension pot crashes

Falls in the stock markets, lack of investor confidence and rising inflation mean a typical 65-year-old now entering retirement will be left with a private pension of just £7,666 a year.

This is almost half the officially recognised income needed each year to maintain an adequate standard of living.

And there is also bad news for those still paying into their private pensions. The report by Aon Consulting showed that an average 30-year-old’s predicted annual income at retirement has now fallen by £518 and a 60-year-old’s by £358.

However, the same hammer blows are not being felt by those in the public sector whose pension pots are still bankrolled by the taxpayer.

The ‘gold-plated’ pensions paid to retired public sector workers cost every taxpayer in Britain more than £500 last year, according to one report.

Pensions expert Dr Ros Altmann warned: “We are heading for social strife when private sector workers rebel against paying other people’s pensions.”

In an effort to tackle the problem, the Government wants to raise the Default Retirement Age to 66 for men by 2016 and for women by 2020. The minimum age at which a personal pension can be claimed was raised from 50 to 55 last April.

The Government has also asked former Cabinet minister John Hutton to conduct a major review of public sector pensions with a view to bringing them back into line with those in the private sector.Financial analysts said the crisis in the private pensions industry was a major worry for the 12 million people who rely on them to see them through old age.

Richard Strachan, senior consultant at Aon Consulting, said: “Though we have seen some improvement to economic circumstances in the past six months, pension pots are in only marginally better shape than this time last year and due to the volatility in stock market activity, pension pots shrank once again during the last month.

“As some areas of the economy forecast growth and others continue to struggle, making the right investment choices is key for any pension investor, whether individual or institutional.

“Employers should ensure their pension schemes – and their default funds in particular – are invested wisely to maximise the green shoots of recovery.”

With financial experts still arguing over the future direction of the economy, uncertainty in the markets has led to marked declines in the values of pension pots in the past four weeks.

The Aon research followed the projected retirement income of individuals at different ages who contribute 10 per cent of a £25,000 salary to a defined contribution pension arrangement.

It also assumed they already had an existing fund of £15,000 for those aged 30 and £150,000 for those of 55 and above.

The analysis centred on the estimated impact of market changes on the pensions of these average workers.

It concluded that such has been the decline in pension pot values, the predicted retirement income of a 65-year-old had now fallen to under £8,000 a year.

The research also discovered that even those who plan to move to cheaper countries in their retirement would struggle to achieve a decent standard of living in their country of choice.

One recent study revealed that one in 10 Britons would like to retire to Spain.

In real terms, British pensioners living on the Continent have seen their state pensions shrink by about £65 a month in recent years because of the strength of the euro.

Tony Attubato, of the independent Pensions Advisory Service, said: “I think this research highlights how important it is to have a retirement- saving plan and then to take a very close interest in it. How we are going to pay for the lifestyle we want when we give up work and retire is a question all of us need to address.

“There are, of course, so many competing demands on people’s monies but the sooner someone is able to start to save, the less onerous it should be.

“The hard reality is that the more you are able to put away, the better the income you will be able to secure when you retire.”

A spokesman for Aon said: “Workers should review how their funds are performing, in conjunction with their financial adviser, on a regular basis to ensure they remain appropriate.

“In general, while equities still provide the best potential for growth over the longer term, they are the most volatile form of investment and if you are within five to 10 years of retirement you could consider switching into less volatile investments such as government bonds and cash.

“Around 90 per cent of company pension plan members remain in their default investment option, which will automatically do the switching for you.

“As a result, it is equally important for the sponsoring employer to review their plan’s default investment option to ensure that it remains fit for purpose and aligned to the current economic climate.”

The coalition Government wants to raise the age at which people are eligible to draw the state pension faster than Labour planned to do.

It will hold a formal consultation to set the date at which the state pension age starts to rise to 66.

The Labour Government had planned to make the same change but with a much longer timescale, starting in 2024.

The state pension age for women is already being raised to 65 and that process will continue as planned regardless of any further changes.