Pensions see Covid recovery but annuities stay low

Pensions see Covid recovery but annuities stay low

Pension fund performance has increased by 13 per cent in Q2 with the average pot recovering much of the ground lost at the start of the year when Covid-19 first hit markets, but annuity rates remained subdued, latest data has shown.

Data from Moneyfacts, published today (August 4), showed after suffering their worst quarterly performance on record during Q1 2020, when the average pension fund lost 15.2 per cent, pension funds recovered strongly during Q2 2020 with the average pot returning 13.3 per cent, the best quarterly performance since Q3 2009. 

Due to this, pension funds have now recovered much of the value lost during Q1, however values still remain 4.4 per cent lower than at the start of January.

Overall, 95 per cent of all funds surveyed by Moneyfacts generated positive returns, with the top three Association of British Insurers pension sectors being commodity/energy (37.5 per cent), North America (22.9 per cent) and Europe excluding UK equities (21.1 per cent).

But Richard Eagling, head of pensions at Moneyfacts, warned those that went against advice and made knee-jerk decisions with their pensions during the Q1 downturn may have missed out.

Mr Eagling said: “The extent to which individuals will have benefitted depends on whether they held their nerve during the severe Q1 2020 downturn. One of the big concerns in the retirement market is that the Coronavirus pandemic could influence the behaviour of retirees and adversely affect their retirement income decisions. 

“It is fair to say that how drawdown customers have responded to recent events could prove decisive in how sustainable their retirement incomes will turn out to be.”

He added: “After the sharp stock market falls in March 2020, regulators such as the Financial Conduct Authority and The Pensions Regulator were quick to urge pension savers to keep calm and not rush into any decisions about their pensions. 

“The fear was that knee-jerk reactions such as changing investment strategies or making withdrawals at an unfavourable time could see individuals compound their losses and damage their long-term retirement prospects.

"Indeed, as the latest pension fund returns clearly show, those individuals that took such action may have missed out on rising pension values as the market recovered.”  

Subdued annuity rates

Despite pension funds making a recovery, annuity rates still remain subdued, the data showed.

The average annual standard annuity income for an individual aged 65 (based on a single life £10,000 level without guarantee annuity) increased by 0.7 per cent in Q2 2020, meaning the average annuity income is still 5.3 per cent lower than at the start of the year.

In Q1 the rates fell by 6 per cent, leaving the average annuity income 1.7 per cent lower than its previous record low in October 2019.

The plunge in rates is due to a decline in gilt yields, which fell as a result of coronavirus and the subsequent market uncertainty.

Despite this, the appetite for annuities picked up during lockdown with provider LV seeing an increase in enquiries from advisers looking for fixed-term annuities.

In February LV received 41 applications with an annual premium equivalent of £287,000, but in March this increased nearly threefold (173 per cent) to 112 applications with an annual premium equivalent of £979,000.