Crumb of comfort as pension returns rise

Income from personal pensions has reached a two-and-a-half-year high on the back of strong investment returns and better annuity rates, research has indicated.

Men paying £100 a month into a personal pension for 20 years would have an average fund of £41,964 if it matured this month, which can be converted to an annual retirement income of £2,639, according to Investment Life & Pensions Moneyfacts magazine.

The increased income, at 1.7 per cent higher than last year, was attributed to better investment returns. Pension fund values were up 13.83 per cent during 2010, the second consecutive year of double digit gains. Returns have also been steady since the start of 2011.

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At the same time, annuity rates have risen significantly.

April’s increase was the sixth consecutive monthly rise, the first time this has happened since August 2008.

Annuities are used to turn pension pots into regular life-long incomes but rates have fallen steeply in recent years on the back of higher life expectancy and lower gilt yields.

Since the beginning of the year however, the average expected annual income for a 65-year-old man buying a standard annuity which does not rise with inflation has risen to £629 (up 3.6 per cent) for every £10,000 saved, compared with £607 per £10,000 last year.

Women have seen a similar rise (3.7 per cent) which lifts their annual income to £589 a year for every £10,000 they have saved, up from last year’s £568.

The increases have pushed average annuity rates to their highest level since October 2009. But despite the recent increase to pension incomes, they are still significantly lower than before.

Anyone who retired in May 2001 with the same savings level would get an annual £6,496 income, more than twice as high. People retiring 15 years ago would get £13,327 a year, five times more for the same investment.

Richard Eagling, editor of Investment Life & Pensions Moneyfacts, said: “Given the headache high inflation is currently posing, the fact that annual retirement incomes have been rising since the turn of the year will at least offer a crumb of comfort for those on the verge of retirement.

“Much of this recent increase is due to higher annuity rates, a trend that is unlikely to persist in the long term.

“Sadly, the recent uplift in average retirement income may ultimately prove to be little more than a temporary respite in the uphill battle to secure a comfortable retirement.”

Meanwhile, insurer Aviva published a report calling on all annuity providers to publish their rates to try to encourage people to shop around for the best deal.

It said medical questionnaires should also be included in pension maturity packs, so the industry can easily identify people who qualified for enhanced annuities which have higher rates.

However, a third of Britons say they have fallen deeper into debt in the past year, with many never expecting to get back into the black, a survey suggested today.

Around 30 per cent say money they owe on credit cards, loans and overdrafts increased in the past 12 months. Of these, 10 per cent say their debts have risen a lot, according to financial website moneysupermarket.com.

The average person in debt owes £8,430, excluding mortgage repayments. Of those who owe money, 14 per cent repay the monthly minimum because most of them cannot afford to pay more, while 4 per cent pay as little as they can to free up more disposable income.

People owing £8,430 who only repaid the minimum would need around 24 years to pay it off.

Tim Moss of moneysupermarket.com, said: ““It is vital credit card borrowers ensure the minimum amount at least is paid off each month, as a missing or late payment could result in the customer forfeiting their promotional rate or incurring fees as well as putting a black mark on their credit file.”