Retirees have seen their incomes almost halve since the financial crash of 2007, according to research by Fidelity International.
People retiring this year have a pension income 46 per cent lower than could have been expected had they retired immediately before the financial crash of 2007, the research found.
This reduction in pensions has been attributed to a real-terms fall in wages, lower market returns and greatly reduced returns on annuities that pay retirement income.
But advisers have warned the research is limited, as it analyses an undiversified portfolio made up of of 60 per cent shares and 40 per cent bonds, and the pension pots are used to buy annuities, which is not the situation of most of their clients, especially since pension freedoms were introduced in April 2015 and the need for retirees to buy the product was essentially scrapped.
Fidelity’s calculations are modelled on someone 10 years away from retirement in 2007 and 1997. Both scenarios use a starting salary of £45,000 with a pension pot of £50,000, and an ongoing contribution of 12 per cent towards the pension.
According to the analysis people retiring in 2007 earned wages which maintained their buying power, 0.9 percentage points above Consumer Price Inflation (CPI) but now this is not the case, with wage growth standing one percentage point under inflation.
With lower earnings, individuals retiring in 2017 paid £5,179 less over 10 years into their pensions. Coupled with less buoyant stock markets and plummeting annuity rates, Fidelity’s calculations showed these people's pots were more than £40,000 smaller at £139,110 in 2017 compared with £180,106 in 2007.
Ed Monk, associate director at personal investing for Fidelity International, said: “This all makes grim reading for the 2017 cohort of retirees yet it’s important not to abandon hope.
“In the period since the crisis the pension freedoms reforms have freed many more people to access their pension pot using drawdown instead of an annuity.
“This comes with greater risk but at least provides an alternative to being locked into low paying annuities and gives you greater flexibility over how you manage your income."
He added that it was important to maximise contributions to take advantage of employer contributions and tax relief.
Nathan Long, senior pension analyst at Hargreaves Lansdown, said retirement is "highly personal" and experiences will differ, but agreed lower investment returns and annuity rates impact on some people retiring in 2017.
This impact will be "lessened" for those who have a defined benefit (DB) pension, which is around half of those retiring today, he said.
Mr Long also pointed out that looking at average annuity rates can be "slightly misleading".
He said: “Today, around two thirds of people qualify for an annuity enhanced because of their health or lifestyle, whereas back in 2007 these were far less commonplace.”
Simon Torry, chartered financial planner at Essex-based SRC Wealth Management, said the research “assumes that people are not taking advice, following a policy that they have set up some time back and did not change”.
He said: “Most of our client portfolios' have all recovered since the financial crisis; in fact some clients are well ahead of where they were at the time of the financial crisis.”
The main difference is that Mr Torry's clients do not buy annuities any more, and have a diversified portfolio, including buy-to-let properties for example, “which have significantly increased in value,” he said.
“When we are giving advice to clients, 10, 15 years prior to retirement, it is all about diversification, it is about having a broad spread of assets, and that does not mean only stock and bonds,” he added.
Sebastian Hurst, chartered financial planner at London-based Plutus Wealth Management, also said the research's conclusions do not apply to his clients.
“It is a very limited example. People in this situation should diversify their portfolios and look for professional advice,” he said.
Mr Long noted that if people want to increase their pensions they “must act early”.
He said: “If you are employed, check to see if you are missing out on valuable employer contributions - many people do.
“Investigating your investment options will also be time well spent. Plenty of information is available to help make informed decisions, seek out investment fund best buy lists or consider taking financial advice.”
maria.espadinha@ft.com
