The pension changes announced in last year's Budget were always going to have an impact on annuity sales, with some commentators suggesting that the market would all but dry up. Rates would undoubtedly feel the impact, and research from Moneyfacts has shown just how quickly the effects have been felt.
The figures show that the average annual income from a standard annuity for a 65-year-old with a £10,000 pension pot fell by 2.8% during the last three months of 2014, and by 2.5% for a £50,000 pension pot, resulting in an annual income of £506 and £2,727 respectively (down from £521 and £2,799 in the previous three-month period). Enhanced annuities suffered an even steeper drop, with the average annual income falling by 3.1% (based on a £10,000 pension pot) and by 2.9% (based on a £50,000 pot) over the same period, giving an annuitant the equivalent of £612 and £3,250 per year (down from £632 and £3,349 respectively).
The cuts are even sharper when looking further back. Since March, when the Budget was announced, the average income payable from a standard annuity has fallen by 5.7% (based on a £10,000 pot), while the equivalent enhanced annuity has fallen by 6.8%. It's clearly been a challenging time for annuity providers with a wealth of re-pricing activity taking place, and in the last year, rates have been cut across the full range of annuity types and options.
Average rates have now fallen in 16 out of the 20 calendar years since Moneyfacts started surveying the market in 1994, and 2014 proved to be a particularly testing time. Enhanced annuities have come under significant pressure, with the more aggressive cuts reflecting the fact that enhanced annuity providers often adjust their rates daily, allowing them to respond more quickly to the prevailing economic conditions – so rates will drop faster as a result.
It's undeniable that the Budget has been the driving force behind many of these rate cuts, with reduced demand from retirees meaning providers have had to re-price their annuities accordingly. Lower business volumes will always result in lower rates, but it isn't just the reduced level of demand that's taken its toll. Yields on fixed investments, which typically generate the guaranteed income from an annuity, have fallen sharply over the last year, and this will also have had a significant impact on the rates, and resulting income, that are offered.
Unfortunately, it means that retirees seeking a guaranteed income from their pension savings will get, on average, a lower amount than if they'd bought their annuity a year ago. However, that could be a small price to pay for those that want the security of knowing they'll never run out of money – something that can't be guaranteed with other retirement income solutions – and those that shop around could still find a great deal.
Shopping around really is key to the whole thing. It's vital to head to the open market to compare all the options, as failing to do so could mean you're left with a lower income than you could have had. Make sure to look for enhanced annuities if you qualify, and it may be worth thinking about alternative arrangements, too – if you're not happy with how far annuity rates have fallen, why not opt for a mix and match approach? Using a proportion of your pension pot for an annuity while keeping the rest invested could be a solution, allowing you to spread the risk for the combination of security and the potential of higher returns.
However, this all means that it's now more important than ever to seek suitable advice. You need to make sure you can maximise your retirement income and that your pension savings go as far as possible, so start the process by consulting our no obligation annuity planner and see what your options could be.
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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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