Annuities have garnered a lot of negative attention recently, and it's largely thought that they'll become even more unpopular when new pension freedoms grace the landscape next year. The only saviour will be if they start to offer savers a better return, but latest figures reveal that this may not happen any time soon.
Research from Investment Life and Pensions Moneyfacts has shown that annuity rates actually experienced their biggest monthly fall for three years during August – which means rates, and the returns offered, are only getting worse.
The figures show that the average annual income from a typical standard annuity for a 65-year-old, based on a £50,000 pension pot, fell by 2.6% in August, meaning the average income fell from £2,874 to £2,797. That may not sound like much to worry about, but over a 20-year retirement, this equates to £1,540 less income.
It also represents the biggest monthly fall in annuity income since August 2011, and leaves annuity income down by 3.2% since the start of the year. Enhanced annuities saw a much smaller reduction of 1.3%, as the table below shows, but enhanced annuity rates have fallen much more steeply than standard rates in previous months.
Average standard annuity
Average enhanced annuity
1 August 2014
1 September 2014
Annuity figures show gross annual annuity payable monthly in advance. Figures are based on a £50K purchase price for a level without guarantee annuity. (Source: Investment Life and Pensions Moneyfacts)
So just why are rates falling so quickly? Well, analysis would suggest that there are two main factors, the first being the significant reduction in 15-year gilt yields, a major influence on annuity rates, which are now at their lowest level since June 2013. The second factor is the growing pressure facing annuity providers to cut their rates, largely in response to the lower demand for annuities since the Budget gave retirees more flexibility in how they can spend their pot.
So, a simple lack of customer demand is having a significant influence on the market and is helping to push down rates. Rather than providers trying to tempt retirees to use their products, they're responding to the changes by, perhaps surprisingly, making annuities even more unappealing.
Richard Eagling, head of pensions at Investment Life and Pensions Moneyfacts, said: "A fall in annuity rates of the magnitude that we saw in August is unusual, but a significant reduction in gilt yields combined with falling demand has left annuity providers with little room for manoeuvre.
"These are testing times for the annuity market and we expect that pricing annuities will remain challenging until the new pension freedoms are introduced next April. Although many individuals approaching retirement will be looking to postpone their decision on how to take a retirement income until then, the significant fall in annuity income that we saw last month will be felt by those who require a guaranteed, secure income now."
Annuities are still the only option for retirees that want the security of a guaranteed income, so seeing that income reduced will be a significant blow. So just what can you do if you want the security without losing out?
As ever, the key is to do your research. Don't just go for the annuity offered by your pension provider but instead approach the open market and thoroughly compare the options, as that's the only way to know you're getting the highest level of income possible. Use our no obligation annuity planner to get started, and see if an annuity could still be a viable choice for you.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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