Retirement income £3,400 less than in 2008

People retiring this year can expect an income £3,400 less than those who finished work in 2008, thanks to a perfect storm of low savings rates and plunging annuity income, it has been warned.

Average retirement income has dropped to its lowest level in six years, an insurer has warned.

This year's retirees can expect a typical annual income of £15,300, making them around £3,400 a year worse off than workers who retired on £18,700 in 2008, Prudential said.

Pensioners have faced a perfect storm of high living costs and low returns on their savings, while plunging annuity rates have wiped thousands of pounds off retirees' incomes in recent years.

Separate research by Moneyfacts, today indicates that annuity income fell by 11.5% in 2012, the biggest annual fall since 1998.

The income gap becomes even worse when the effect of inflation is taken into account. Someone who retired last year would have needed an annual income of £21,400 to have the same spending power as an average person who entered retirement in 2008, Prudential said.Insert Blockquote

But the average amount people retired on last year was £15,500, leaving them £5,900 worse off in real terms than workers who retired in 2008.

[Related link: Free guide to making the most of your retirement income]

Where’s worst  

Across Britain there is a £5,700-a-year difference between the regions with the highest and the lowest anticipated incomes for people retiring this year.

Londoners expect to retire on an annual income of around £18,200 this year, while retirees in the West Midlands have the lowest anticipated incomes, at £12,500.

Experts also warned that possible changes to the way that Retail Price Index (RPI) is worked out could lead to more people being forced to put their retirement on hold due to the squeeze on their incomes.

Tom McPhail, head of pensions research at financial services company Hargreaves Lansdown, said: "As a result of the economic downturn, living standards have stagnated across much of society but those approaching retirement have been particularly hard hit.

"Annuity rates have fallen by a third in just four years. For people approaching retirement, that is a huge blow to their expectations at a time when it is probably too late for them to do anything about it."

Hargreaves Lansdown said that a 65-year-old man with a £100,000 pension pot could have secured an annual income of £7,855 by buying an annuity in the summer of 2008 but if he was doing so in December 2012, that figure would have fallen to £5,338.

The average expected retirement incomes for this year by region

London   
£18,200
South East
£16,900   
South West   
£15,600
Wales
£15,200
Eastern
£15,200
North East
£15,100
Scotland
£15,000
North West
£14,700
East Midlands
£13,900
Yorkshire and Humberside
£13,400
West Midlands
£12,500



Why it’s getting worse

Quantitative easing (QE) has been blamed for pushing down annuity rates which set the size of someone's retirement income for life. QE makes it cheaper for companies to borrow by pushing down the yield on government bonds, but annuity incomes are also based on these yields, meaning that new pensioners see their incomes reduced.

Mr McPhail said: "Possible changes to the calculation of RPI this week are only likely to make the situation worse, as incomes could rise more slowly in the future. One consequence of this is that we are likely to see retirement ages rising quite rapidly for the simple reason that people can't afford to retire when they'd originally planned to."

The Office for National Statistics has been consulting on changes to the RPI and the recommendations from this will be announced on Thursday.

But Hargreaves Lansdown has warned that even a small alteration could amount to a "stealth attack" on pensions, as many annuities are linked to RPI. It has argued that a pensioners' inflation index could make a fairer base for working out state and private pensions.

Rising bills toughest for pensioners

Older people are hit harder by food and energy price increases than the population generally because they spend a higher proportion of their income on these basics, the firm said.

A recent report from Aviva said that one in four 65 to 74-year-olds are still earning a wage, reflecting a trend of older people remaining in the workplace for longer.

This trend is set to continue as baby boomers pass the age of 65, with 55% of 55 to 64-year-olds drawing a salary, compared with 41% in February 2010, Aviva said.

The Prudential study surveyed around 8,600 non-retired people aged 45-plus, including around 1,000 who plan to retire this year.

Vince Smith Hughes, retirement expert at Prudential, said: "Those who are still working should think about saving as much as possible as early as possible to give themselves the best chance of building up a decent pension pot to help to ensure a comfortable retirement."

Ros Altmann, director-general of Saga, said: "These figures are quite shocking and suggest that those reaching retirement now have been dreadfully impacted by the financial crisis.

"Far from the conventional picture of pensioners doing much better than other groups, it is clear that older people are facing significant income falls, which will impact their future lives significantly.

"Of course, many are now choosing to work longer, or feeling forced to, but it is deeply worrying that pension incomes are falling so fast."

Dr Altmann said that policymakers need to realise the extent to which QE and ultra-low interest rates, combined with high inflation, have taken their toll on pensioners.

She added: "Although there is a minority of very well-off older people, the vast majority are being badly squeezed by the current economic situation."