The Daily Telegraph - Saturday - Money
Ten years on, retirees are 46pc worse off
New analysis reveals how those who retire in 2017 have half the income of their precrisis counterparts, writes Sam Brodbeck
Ten years on from the collapse of Northern Rock, the devastating impact of the financial crisis on the pensions of savers approaching retirement is only now becoming clear. A potent mix of record-low interest rates, stagnant wages and rising inflation has left pension investors a staggering 46pc worse off than those who retired before the crisis, analysis compiled exclusively for Telegraph Money reveals.
The research, conducted by Fidelity, the fund manager, shows that a typical pension pot in 2017 would be able to produce an annual income of only £6,607, only just over half the £12,193 retirees in 2007 enjoyed.
The research compares the 10 years before 2007 – the year when Northern Rock imploded and the US investment bank Bear Stearns realised it was in trouble – with the past decade. It assumes that someone with an existing £50,000 pension pot and a salary of £45,000 is saving 12pc of their wage into a pension.
Average earnings rose by 3.5pc a year between 1997 and 2007, according to the Office for National Statistics, more than keeping pace with inflation, which averaged 2.6pc over the same period. But while salaries grew by 1.7pc between 2007 and 2017, the cost of living rose by 2.7pc annually, meaning that workers suffered a pay cut.
Falling real wages were exacerbated by lower investment returns. A typical pension portfolio comprising 60pc global stocks and 40pc global bonds returned 5.9pc a year in the decade to 2007. However, returns on the same portfolio nearly halved (with returns of 2.7pc) the following decade.
Lower wages, and in turn lower levels of pension savings, combined with weaker investment returns, mean the younger saver ends up with £40,997 less than their older counterpart, with a final pot worth £139,110 against £180,107 (see table on Page 3).
Using historic market rates for annuities – insurance contracts that pay a guaranteed income for life – the research shows how much the savers would have to live on in retirement.
In 2007 the average non-inflationlinked annuity rate for a single person was 6.8pc, according to Moneyfacts, the data firm. At those rates your pot could buy an annuity that paid £12,193 a year.
While rates have increased this year, they are still far below pre-crisis levels at 4.75pc. The smaller pot saved by 2017 would produce an income of only £6,607 a year in today’s market.
“Sometimes it’s better to be lucky than good, and those who retired before the financial crisis have certainly been luckier than those who followed them,” said Fidelity’s Ed Monk.
“We already knew that those safely retired by 2007 were more likely to have gained from generous ‘final salary’ pension schemes. This work shows that even on a level playing field where a pension pot is invested, poor wage growth and lacklustre markets have conspired once again against younger savers.”
Insurers peg annuity rates to the yield on long-term UK government bonds, known as gilts.
The firms have to hold these bonds against their annuity promises so if gilt yields fall, as they have fairly steadily since 2007, they have less to pass on to customers.
There are several reasons gilt yields have fallen over the past decade but the most significant is the action of the Bank of England in the wake of the crisis. It cut interest rates and bought billions of pounds worth of gilts as part of a “quantitative easing” policy designed
London property is sagging and inflation is bringing on a fit of national belt-tightening. But the beach hut market – where people spend hundreds of thousands of pounds on small sheds with no plumbing, privacy or security of tenure – appears entirely impervious.
Two huts on Mudeford Spit, a beach near Bournemouth in Dorset, are on sale for £275,000, prices believed to be the highest in history. There is little shortage of interested viewers, apparently.
£1,610 £1,700 £1,367 £829
At £1,600 per square foot the hut costs the same as property in London’s Chelsea. The buyer will also have to pay £2,000 a year to the local council for a licence plus £500 council tax. The council, by the way, has the power to force you to move the hut at any time.
James Ricketts, an estate agent for Denisons, which is selling one of the huts, said buyers would have to be “a bit bonkers”. The upside is that being just a shed there is no stamp duty on the purchase.