Pension incomes have fallen by more than 70 per cent during the past decade, leaving savers facing an uphill struggle to fund a comfortable retirement, research showed today.
A man who saved £100 a month into a private pension for 20 years can expect an annual retirement income of just £2,542 now, a 72 per cent drop from the £8,998 he would have received in 2000, according to Investment Life & Pensions Moneyfacts.
The group estimates that people would have to more than triple the amount they set aside to achieve a similar income to the one they would have got 10 years earlier, raising their monthly contributions from £100 to £355.
Richard Eagling, editor of Investment Life & Pensions Moneyfacts, said: "Although these figures do little to inspire confidence, they at least serve as a powerful reminder of the investment risks inherent in saving via a defined contribution pension.
"It is clear from such alarming statistics that if the pensioners of tomorrow are to enjoy the same level of retirement as their predecessors, much has to change and quickly."
The problem has been caused by a steep fall in investment returns, leading to a 60 per cent drop in the maturity value of private pensions during the past decade.
The group said someone who paid £100 a month into a balanced managed fund for 20 years could expect a final pension pot worth just £40,749 if they retired today, compared with one of £103,914 if their policy had matured in 2000.
Payouts would have been even lower if it had not been for the strong stock market performance seen during 2009, leading to the average pension fund growing by 22.35 per cent, the highest annual return since 1999.
The situation has also been made worse by a steady decline in annuity rates during the past few years.
Annuities are used to convert a pension pot into an annual income for life, but a combination of falling gilt yields and increased life expectancy has led to a 28 per cent decline in their rates since 2000.
As a result, a 65-year-old man taking out an annuity that does not increase in line with inflation can now expect an average income of just £624 a year for every £10,000 in his pension pot, down from £866 per £10,000 a decade ago.
Meanwhile, the Association of British Insurers warned financial advisers who had clients who wanted to draw their pension before the minimum retirement age increases to move fast.
From April 6 the National Minimum Pension Age is increasing from 50 to 55.
The ABI said people aged between 50 and 55 who wanted to start drawing their pension before the new age limit comes into force, must have submitted applications for an annuity with providers by 5pm on Monday March 1 to ensure it could be processed in time.
Maggie Craig, the ABI's acting director general, said: "This is a very important change and it is vital that potential retirees have been notified.
"Advisers should be working towards concluding their client consultations and advice processes, to make sure applications for early retirement decisions are received as soon as possible, and by March 1 2010 at the latest.
"Although provider transfer processes have been significantly improved recently, no chances should be taken. Advisers should act now and ensure applications are received as soon as possible."
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies