Data from the latest Moneyfacts UK Personal Pension Trends Treasury Report has revealed mixed fortunes for the retirement sector during the first-quarter of 2019, with pension fund returns performing strongly but annuity rates declining.

Pension funds endured a marked downturn in the fourth-quarter of 2018, with the average pension fund falling by 7.3%.

As a result, in 2018 pension funds suffered their biggest losses since the 2008 financial crisis.

However, performance-wise, pension funds have made a bright start to 2019. In the first-quarter of 2019, the average pension fund recovered much of last year’s lost ground by generating returns of 6.7% – the strongest quarterly pension fund performance since the third-quarter of 2016.

Richard Eagling, head of pensions at Moneyfacts, said: “While 2018 was a difficult year for pension fund performance and drawdown investors, it was a relatively calm year for annuities. However, the respective fortunes of the different areas of the retirement market can quickly change, as seen in the first-quarter of 2019, with annuity rates once again falling.”

The generally more favourable market conditions for pension funds is reflected in the fact that all the ABI pension fund sectors and 95% of the 5,528 pension funds surveyed produced gains. Property funds fared particularly well in the first-quarter of 2019, with the top three ABI pension fund sectors consisting of North America Equities at 10.9%, UK Property Securities at 10.4% and Global Property at 10.2%.

By contrast to pension fund returns, average annual income for those seeking the security of an annuity fell in the first-quarter of 2019. In the first three months of the year, the average annual standard level without guarantee annuity income for a 65-year old with a £10,000 pension pot decreased by 1.4%.

Since pension freedoms were introduced, it has been noticeable that pricing trends have generally been more favourable for larger annuity purchase prices, but in the first-quarter of 2019 this was not the case. At the higher purchase price of £50,000, the average annual standard level without guarantee annuity income fell by 1.8%.

This latest fall means that the average annual standard annuity income is at its lowest level since October 2017 and is down by 4.3% since the introduction of pension freedoms in April 2015.

After falling for two consecutive quarters, the average retirement income for an individual contributing £100 gross each month into the average pension fund over a 20-year period and retiring at age 65 with a standard level without guarantee annuity increased by 3.9% during the first-quarter of 2019, from £2,054 to £2,135. This improvement has primarily been driven by stronger pension fund returns, which offset the reductions in annuity income.

Eagling added: “Despite this latest increase, average retirement incomes remain lower than a decade ago, reinforcing the need to improve consumer engagement with pensions and highlighting why the Government is keen to introduce new legislation to facilitate alternatives to the traditional choice between defined contribution and defined benefit pension schemes.”

Commenting on the research, Rajesh Modha, chartered financial planner for the Finance Lab, said: “There will always be volatility within the equity markets. Clients need to be educated of this and as advisers we need to at least have a conversation relating to the client’s perceived reaction to this type of event. Our responsibility is over the longer term – say 30 years – and so the noise of the fourth-quarter of  2018 will be all but forgotten in that time frame.

“The question I need to ask is always the same – over a lifetime of required cash flow to meet lifestyle and aspirational needs. Is the client able to achieve this? Do we have a strategy in place to mitigate the effects of a bear market when they occur? Is the client comfortable of the consequences of a market downturn? Have we discussed how they are expected to react?”

Further reading on this topic:

Money makeover: How to plan for retirement