Pension fund growth and annual annuity income fall amid Covid-19 impact

Industry experts have warned that consumers preparing to retire may have to delay or change their plans due to the impact of the Covid-19 pandemic, after Moneyfacts' research found that both pension fund growth and annual annuity income fell in 2020.

The research revealed that whilst pension fund growth hit 4.9 per cent in 2020, this represented a fall compared to the 14.4 per cent growth seen in 2019, arguing that this therefore may have fallen short of retiree’s expectations.

Furthermore, it noted that annual annuity income continued to fall at the same time, with an average annual annuity income of -6.3 per cent in 2020, marking the third year of consecutive falls.

Indeed, the research showed that since pension freedoms were introduced in 2015, annuity income has fallen for five out of the six years, with growth only seen across the market for a one full year in 2017, which was 1 per cent.

Moneyfacts finance expert, Rachel Springall, acknowledged that retirees considering an annuity would be "disappointed" by the performance, stating that it would be understandable for them to favour pension drawdown instead.

Commenting on the findings, she said: “Despite the economic and political turmoil of 2019, pension fund growth was the most promising it had been since 2016, however, the scene has not been so rosy for growth over the past year and no one could have predicted the devastating impact the Coronavirus pandemic would have on consumers’ everyday finances, plausibly affecting their future retirement plans.

“Thankfully, there has been performance growth of 4.9 per cent over 2020 despite a notably volatile stock market, so regardless, it’s good to see some form of growth but it is less than that of the 14.4 per cent growth seen a year prior.

“Those consumers who are approaching retirement may find they have a shortfall due to market turmoil and that their cash savings are earning little interest with rates falling to all-time lows."

She also emphasised that, in light of the pandemic, some consumers may have made the decision to dip into their pot using pension freedoms or plan to do so soon, in order to help with more immediate financial issues.

This follows recent HMRC figures, which revealed that £2.3bn was withdrawn from pensions flexibly in Q3 2020, whilst industry research has revealed that over half of savers were likely to reduce contributions in favour of rainy day savings, and 19 per cent would have been likely to withdraw from their pension during Q4 2020 if they had early access

Springall continued: “Clearly it would be wise for consumers to seek independent financial advice when it comes to their retirement plans and keep up with regular reviews of their investments and options.

“A workplace pension may not be sufficient to meet someone’s retirement goals and if unchecked too late, it could delay their retirement plans or force them to seek other ways to plug the gap.”

Adding to this, Canada Life annuities director, Nick Flynn, argued that annuities still have a role to play in modern retirement journeys and that they no longer need to account for the entirety of a person's retirement income, with pension freedoms meaning that they can be used as part of a much more flexible retirement plan.

He said: “People may want to consider buying annuities in tranches over time, as you age you will receive a better rate than you will have done at 60 or 65 for example.

“Annuities can also be combined with a drawdown plan, so it doesn’t need to be perceived as an either/or decision. Many people use the guaranteed income an annuity provides to cover their annual living costs or bills, then use a drawdown pot to cover anything outside of that.

“This provides the absolute peace of mind that their current lifestyle is secure. Retirement should be about enjoyment and not financial worry.

“As with many financial products, the biggest mistake people can make is in not shopping around for the best price. Don’t simply accept the offer provided by your pension company, speak to a financial adviser to find out the wide range of products available to see what will work best for your individual circumstances.

“The difference in rates can be significant, especially if you take any medication, smoke or drink. Almost any regular medication will qualify for an enhanced annuity which is essentially more income for life.”

The findings also follow research from Fidelity International, which revealed that 38 per cent of furloughed workers are expected to change their retirement plans amid the pandemic, with many expected to work an additional two and a half years.

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