09/01/13
An insurance company has revealed that people retiring in the UK this year will have a lower average income than those leaving work in the past five years.
Prudential says that retirees will have an average annual income of £15,300 in 2013, which is as much as £3,400 per year less than it was in 2008, and when inflation is taken into account they are even worse off.
The average retirement income was £15,500 last year compared with £18,700 in 2008, but people would actually have needed £21,400 in 2012 to have the same spending power, so they are in fact £5,900 worse off in real terms.
The head of pensions research at financial services firm Hargreaves Lansdown, Tom McPhail, says that living standards have "stagnated" in the UK in recent years but that people nearing retirement have been hit harder than most.
He points to the fact that annuity rates have plummeted by a third in the past four years as the principal reason and says that is "a huge blow" to a lot of people, many of whom will be powerless to effect the situation as it is "too late".
A 65-year-old man with a pension pot of £100,000 could have had £7,855 per year in income if he bought an annuity in the summer of 2008, but in December 2012 he would only have been able to get £5,338.
Quantitative easing (QE) has also had an effect on annuity rates because it pushes down the yield on government bonds, which makes it cheaper for firms to borrow but also reduces annuity incomes and new pensioners' incomes.
Meanwhile, potential changes to the way the Retail Price Index (RPI) is calculated may cut their income as well and cause more people to remain in employment for longer.
The Office for National Statistics has been discussing possible alterations and Mr McPhail says that they would mean incomes will increase "more slowly" in future and that will "make the situation worse".
Older people are hit harder by food and energy price rises than others because they spend a higher percentage of their income on them and a lot of annuities are also linked to the RPI.
As a result, Hargreaves Lansdown says even a small change could be interpreted as a "stealth attack" on pensions and it thinks that introducing a pensioners' inflation index would be a fairer way to calculate all state and private pensions.
Pensioners have lost thousands of pounds in recent years as a result of falling annuity rates and the combination of high living costs and low returns on their savings, and the current picture is very different from region to region across the country.
There is now a difference of £5,700 per year between the regions with the highest and the lowest expected retirement income, with Londoners expect to get approximately £18,200 and those in the West Midlands due to get just £12,500.
