Personal Pension  

Retirement pot estimations come up £100k short: Axa

Consumers are on average almost £100,000 out on their projections for the amount of savings they will require to produce a standard £20,000 income in retirement due to current depressed annuity rates, according to Axa Life Invest’s pensions index.

The research shows people currently estimate they need a retirement pot of £251,000 to allow them to have a £20,000 annual income in retirement, but Axa Life said current annuity rates mean a pot of almost £350,000 is required.

Axa Life Invest asked savers how much they thought they would need to have saved in order to generate an annual income of £20,000 from an annuity at age 65.

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The index found that January was the best month to retire so far this year. A lump sum of £315,000 invested in the FTSE 100 for 10 years up to January 2013 would be worth £555,497, while the same sum invested for 10 years up to July 2013 would be worth £502,849.

Axa said annuity rates have remained relatively flat over the last twelve months and are currently depressed because of the low interest rate environment and the effects of quantitative easing.

Annuity rates have improved slightly since the start of the year but their increase from 5.61 per cent in January to 5.79 pre cent in July was not enough to offset the downturn in markets, the firm added.

Using the Pensions Index example, those people who chose to retire in January could take an annual income of £31,138, 7 per cent or £2,030 per annum more than the £29,108 people retiring in July could obtain.

Simon Smallcombe, managing director of Axa Life Invest in the UK, said: “Annuities are in many ways a gamble as you’re committing to an income for the rest of your life but are at the mercy of annuity rates and investment performance in the run up to your retirement date.

“It’s often only with the benefit of hindsight that many people recognise that they could have held out for a couple of months and seen a tangible increase in income or vice versa. The best way to mitigate these risks is by seeking out financial advice early.

“That way your adviser can lay out all the various options including ways to grow your savings or look at guaranteed products that offer a secure income, but with the potential to remain invested in the stock market.”