The Noughties were disastrous for pensions, thanks to a brutal double whammy...
Habitual Fool readers will know that the Noughties proved to be a lost decade for stock-market investors. Alas, the blue-chip FTSE 100 index fell by some 20% from 2000 to 2009. Even after adding dividends into the mix, the Footsie rose by a feeble 9% over ten years.
Of course, plunging equities have been a big headache for those investing for retirement. Indeed, pension investors face an uphill battle to fund a comfortable retirement, according to Investment Life & Pensions Moneyfacts. Its latest survey of personal pensions found that the value of a typical pension plan plummeted during the Noughties, as the following table shows:
Plunging pension funds
Maturity date
(1 Jan) | Fund Value
(£) | Annuity
per £10,000
(£) | Annual
Income
(£) |
|---|
| 2000 | 103,914 | 866 | 8,998 |
| 2001 | 84,906 | 859 | 7,293 |
| 2002 | 64,325 | 807 | 5,191 |
| 2003 | 45,365 | 717 | 3,252 |
| 2004 | 47,622 | 700 | 3,333 |
| 2005 | 46,589 | 682 | 3,177 |
| 2006 | 50,134 | 661 | 3,313 |
| 2007 | 50,577 | 670 | 3,388 |
| 2008 | 49,617 | 700 | 3,473 |
| 2009 | 36,325 | 684 | 2,484 |
| 2010 | 40,749 | 624 | 2,542 |
| 2000 to 2010 | -61% | -28% | -72% |
The table show the maturity value of a typical personal pension pot, based on a monthly contribution of £100 for 20 years (£24,000 in total). As you can see, in 2000, the average managed pension fund would have matured with a value of close to £104,000. Unfortunately, fund values have crashed over the past decade, with our pot falling to under £40,800 in 2010.
Part of the problem is that the 1980s and 1990s were exceptional truly years for shares. So 20-year funds maturing in the early 2000s benefitted from extremely fortunate timing, as they neatly straddled a period of abnormally high returns.
A double blow for pensions
Sadly, this is only half the story, because annuity rates have also hit the floor. The third column of the table shows how the average annuity income paid by insurance companies dived during the Noughties.
Ten years ago, a pension pot of £10,000 would have bought a 65-year-old man a yearly income of £866 for life. Unfortunately, annuity rates closely follow gilt yields (the income paid by UK government bonds). Declining gilt yields, together with increasing longevity, have contributed to a slide of 28% in annuity rates during the Noughties.
Put together, lower fund values and reduced annuity rates add up to a fall of more than 72% in pension incomes. A £100-a-month contribution for 20 years into a personal pension maturing in 2000 would have bought you a yearly income of just shy of £9,000. Today, the same payments would buy a pension income worth a little over £2,500 a year.
Any answers?
There are three main ways to tackle this problem: save a larger proportion of your income, start investing earlier, or earn greater returns on your pension contributions.
If you are saving for a pension for 30 or even 40 years, for example, your fund be will significantly larger. And you can increase your returns by reducing your pension charges, perhaps by switching to a modern, low-cost pension such as a stakeholder or SIPP (Self-Invested Personal Pension). Personally, I'm a huge fan of my SIPP, as it gives me all the freedom and flexibility I need to build my own DIY pension.
What lies ahead?
In some ways, it's not surprising that the Noughties were dreadful for pensions and other stock market-linked investments. People retiring a decade ago enjoyed a period of excellent returns and then could convert their pensions at relatively high annuity rates. It really was the best of both worlds.
Then again, history shows that a decade of poor returns is most often followed by bumper returns for shares. As I revealed in Get Ready For Great Returns, double-digit yearly returns often follow dreadful decades -- as happened in the roaring Twenties and booming Eighties. In my view, those who continue to save for retirement by investing in shares over the 'Tenties' have a decent chance of more reasonable returns.
Lastly, if you'd like to discover how your pension could grow over time, then try the calculator at Standard Life's Get A Reality Check website. Just make sure you're sitting down when you look at the results!
More from Cliff D'Arcy:
> If you're saving for retirement, try an online broker account with The Motley Fool's Share Dealing Service. You can also open a SIPP and Self Select ISA. Click here to find out how to open an account for free today.
