Retirement incomes fall by £3,400 a year

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Retirement incomes have fallen by almost a fifth in just five years, according to one of Britain's biggest insurers.

People who retire this year expect an annual income of £15,300, compared with £18,700 in 2008, a survey by Prudential (LSE: PRU.L - news) found. This is a fall of £3,400 or 18 per cent.

The decline is even greater once inflation is taken into account. To keep pace with the rise in prices since 2008, which totals 14.7 per cent, someone who retired last year would have needed an annual income of £21,400.

Although the nationwide average figure for expected incomes have fallen since last year, when it was £15,500, people's expectations recovered in some parts of the country. In Yorkshire & Humberside, for example, expected incomes for 2013 are £13,400, £600 more than last year. There were also increases in London, the North-West, the South-West and Scotland, Prudential said.

Vince Smith Hughes, a retirement expert at Prudential, said: "People entering retirement this year are continuing to feel the squeeze as their expected incomes have fallen for the fourth time in five years, to a new low. The continuing trend is even more concerning, when you consider that rising inflation is eroding pensioners' spending power in real terms.

He said people still working should think about saving "as much as possible as early as possible" to build up a decent pension pot.

Although the state pension rises by at least the rate of inflation each year, most private pensions are subject to the vagaries of financial markets, with no guarantee of a particular income in retirement. Workers who belong to their employer's pension scheme typically contribute each month, with the company doing the same, but the final value of their pension savings depends on investment returns.

Then, when workers use these savings to buy an income for life, they are at the mercy of annuity rates, which are set by insurers. These rates tend to reflect broader interest rates, especially the rate at which the Government can borrow. Such interest rates are close to record lows, so the income that pension savers can buy with a given sum has fallen dramatically in recent years.

People who are still a few years from retirement age have been promised a better state pension, although anyone who is already retired when the "single tier" payment is introduced will not benefit.

The Government has repeatedly said that the new "flat rate" state pension will be about £150 a week, but details are still sketchy and no firm date has been announced for its introduction. A promised White Paper has been delayed repeatedly and this week's "mid-term report" from the Coalition did not say when it would be published.