Once upon a time the theory behind pensions used to be relatively simple: save extra for your retirement via a personal pension and sit back, relax and ease your worries about living comfortably in your old age

Image: A 72% fall! Rodney was adamant his pension provider was having a giraffe!

Cue images of elderly couples sipping Martinis by the poolside on a sun-drenched tropical island or leisurely taking in a round of golf.

However, the modern day reality of pension saving means such hopes and aspirations may be out of reach, and tomorrow’s pensioners may have to lower their retirement expectations.

For most of us, funding for our retirement consists of two elements: the first involves paying into a pension scheme on a regular basis in order to generate a decent pension pot; the second involves transforming these proceeds into a retirement income (typically via an annuity).

Unfortunately, pension savers have been hit by a double whammy over the last decade, with falling stock market returns diminishing the size of their pension pots, and lower gilt yields and increased longevity forcing annuity rates to historic lows.

The result of all this is a pension income that is almost 72% less than someone who had retired ten years ago. Sounds fair? No, but it is very much a reality and it is time for the pensions industry and consumers to recognise just how desperate the situation is becoming.

To emphasis the scale of the problem, it is worth looking at a simple example. A male who retired 10 years ago and had paid £100 gross per month into a personal pension for 20 years would have built up a pension pot of £103,914. By turning this into an income using a standard level without guarantee annuity, he would have received £8,998 per annum.

By contrast, someone who retired this January having paid in the same contributions over a twenty year term would have built up a pension pot of less than £41,000, producing an annual income of just £2,542.

Whilst it can be argued that the last decade has been exceptionally tough for investors, with the dotcom crash and the credit crisis severely curtailing stock market returns, there are no guarantees that the financial climate will be any more favourable over the next decade. Indeed, few experts believe that we will see any substantial uplift in the annuity rates paid by insurance companies going forward.

So what can you do to increase your chances of avoiding a retirement in poverty?

1. Review your pension performance at least annually – Given such depressing statistics, it may be tempting to leave your pension statements to gather dust, but now is the time to ensure that you are not stuck in consistently underperforming funds. The difference between the best balanced managed fund returns and the worst over the last 20 years is a considerable 28%.
2. Consider a SIPP - If you fancy taking greater control of your retirement destiny and want to invest in a wider choice of funds and investments, then a self invested personal pension may be a better option.
3. Increase your contributions – You may be thinking, why throw good money after bad? However, increasing the amount you pay into a pension will substantially improve your chances of producing a bigger pension pot. To achieve the same pension income as someone who retired a decade ago and had been contributing £100 per month gross, those retiring now would instead have needed to save around £355 gross per month.
4. Seek an enhanced annuity - If you are in poor health or a smoker you may be eligible for an enhanced annuity. These typically pay out around 20% more than a standard annuity

Alternatively, if your heart is set on lunch aboard a cruise ship in your golden years rather than a retirement on meals on wheels, then there is one sure fire winner: become a MP!

Richard Eagling is Editor of Investment Life & Pensions Moneyfacts