Is there any point saving into a pension?

Nearly seven private sector workers in ten don’t pay into a pension, according to Government statistics, but is this really all that surprising?

Retirement income has fallen by thousands in just a few years. People finishing work this year can expect an average income that is £3,400 less than those who retired five years ago in 2008, according to figures from Prudential.

Meanwhile, the Financial Services Authority (FSA) has announced that it is investigating annuities, which are how you turn your pensions savings into a regular income for life.

And this comes just days after the Office of Fair Trading (OFT) announced it has launched a probe on workplace pensions. It will question how pension companies compete with each other and how much pressure there is to keep costs as competitive as possible for consumers.

So not only are you getting less money, but it seems the people offering you what little cash is left are determined to confuse, obfusticate and mislead you out of what is best for you to what it most profitable for them.

How bad is it?

In early 2010, if you were male and retiring at 60 and had built up a pensions pot of £100,000, that could have bought you an income of £7,157 a year for life. Just three years later, the best annuity a 60-year-old man can buy with £100,000 is £5,038.

That’s a shocking 30% fall in income in just three years.

Not only are there drops in what your savings will buy you, there are also concerns about how easy it is to save build up a retirement pot in the first place.

The OFT is investigating the charges administered by pension providers. When workers pay into their pension fund, the money is invested by the provider in an effort to grow the savings. There is a fee for this service.

The stock market has provided a pretty dismal rate of return over the past few years. But to make matters worse, pension savers have, in many cases, been charged costly fund fees for the privilege of small returns.

The charges have faced fierce criticism because in some cases they can wipe the value of funds by thousands. In fact, the FSA estimates that the value of a pension fund is reduced by nearly a third over its lifetime thanks to fees and charges.

Why payouts are dropping

Annuity rates depend in part on the payout of Government bonds, known as gilts. When demand for gilts increases, their payouts fall and, in turn, so do annuity rates. 

Since the economic crisis took hold, gilts have been hovered-up.  One significant cause behind this is the Bank of England’s Quantitative Easing (QE) programme, which bought gilts in their drovers, helping to push the yields down.

Aside from gilts, there are other causes that have pushed down annuity rates. Principally that we are living longer and, therefore, annuities have to pay out for longer so offer less each year.

So should we bother then?

Without a doubt, we should all absolutely save into a pension. Anyone who doesn’t save will be on course, bluntly speaking, for a retirement ridden out in poverty.

The Government recently announced an overhaul of the state pension to take effect in 2017. Weekly payouts will be about £144 – or less than £7,500 a year – and rise in line with inflation. In addition the state pension age is rising in line with increasing life expectancies. Anyone born after 6 April 1968 is expected to have a retirement age of at least 68.

If you want more than that or to retire earlier, funding will come from no place other than your own savings. And the best way to pull together a pot is still through a pension.

Nigel Green, chief executive of advisory firm the deVere Group, said: “It is becoming increasingly clear that financial support for older people from the state is reducing, making financial security in retirement ever more a personal responsibility for each and every one of us.”

[Free guide: How to avoid running out of money in retirement]