Is It Worth Getting a Pension?

Every day there is seemingly more bad news about retirement income and how pensions are failing people who are retiring. This article looks at whether pensions are set to become obsolete for the average British worker.

According to recent Government statistics nearly seven out of ten private sector workers don’t pay into a pension at all, but is this really surprising?

Retirement income has been falling by thousands over the last few years. Prudential figures show that people finishing work this year can expect an average income that is £3,400 less than those who retired only five years ago in 2008.

In the meantime, the Financial Services Authority has just announced that it is investigating annuities, which are how you turn your pensions savings pot into a regular income for retirement.

And this comes on the back of the Office of Fair Trading announcing it has launched a probe into workplace pensions. This probe will question how pension companies compete with each other and how much pressure there is to keep costs competitive for consumers.

What this means is that not only are you getting less money, but seemingly the people offering you what little cash is left are determined to mislead and confuse you out of what is best for you, into what it most profitable for them.

How Bad Are Things?

At the beginning of 2010, a male retiring at 60 with a pension pot of £100,000, could have bought an income of £7,157 a year for life. Just three years later, the best annuity a 60-year-old man can buy with £100,000 is £5,038. Thais correlates to a massive 30% fall in income in just three years.

Not only are there drops in what your savings will buy you, there are also concerns about how easy it is to save build up a retirement pot in the first place.

When workers pay into their pension fund, the money is invested by the provider in an effort to grow the savings. There is a fee for this service.

The stock market has been providing a pretty poor rate of return over the past few years. But to make matters worse, pension savers have, in many cases, been charged costly fund fees for the privilege of these poor returns.

The charges have faced fierce criticism because in some cases they can wipe the value of funds by thousands. In fact, the Financial Services Authority estimates that the value of a pension fund is reduced by nearly a third over its lifetime thanks to the combination of fees and charges.

Why Are Payouts Dropping?

Annuity rates are dependent in part on the payout of Government bonds, known as gilts. When demand for gilts increases, their payouts fall and therefore so do annuity rates.

Since the economic crisis took hold, gilts have been hovered-up. One significant cause behind this is the Bank of England’s Quantitative Easing programme, which bought gilts in massive amounts, helping to push the yields down.

It is not just the fault of gilts. There are some other causes that have also pushed down annuity rates. Principally the fact that we are living longer and, therefore, annuities have to pay out for longer time so can only offer less each year.

Should We Bother With a Pension Then?

Apart from exceptional circumstances, we should all absolutely save into a pension. Anyone who doesn’t save will be on course, bluntly speaking, for a retirement ridden out in poverty (unless they have other income sources of course).

The Government's recently announced overhaul of the state pension will take effect in 2017. Weekly payouts will be about £144 (or less than £7,500 a year in current terms) and rise in line with inflation. In addition the state pension age is rising in line with increasing life expectancies. If you were born after 6 April 1968 you will have an expected retirement age of at least 68.

If you want more than the basic state pension or wish to retire earlier, funding will have to come from your own savings. And the best way to build up a substantial pot is still through a pension.