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Warning for retirees as annuity rates plummet

Warning for retirees as annuity rates plummet

Category: Annuities

Updated: 27/10/2014
First Published: 27/10/2014

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

For those looking to secure a guaranteed income throughout retirement, getting a decent annuity rate is the key to ensuring financial comfort. However, latest research from Moneyfacts has revealed that this may not be so simple, as annuity rates have plummeted after a difficult few months.

A perfect storm

Figures from the Moneyfacts Personal Pension and Annuity Trends Treasury Report have revealed that the annuity market has been enduring a "perfect storm" over the last three months, as a combination of plummeting gilt yields and a marked slowdown in annuity demand following the 2014 Budget have taken their toll on annuity rates.

Standard annuities bear the brunt

Standard annuity rates witnessed the biggest reductions in the third quarter of the year, a turnaround from the previous three-month period when enhanced annuities saw the biggest downturn. Providers have found it difficult to maintain their standard annuity rates, resulting in the average annual income payable from a standard annuity falling by 2.7% at the £10,000 purchase price and by 3% at the £50,000 purchase price.

As a result, annuity rates ended the third quarter of 2014 at their lowest level since November 2013. The table below, which shows average standard pension annuity rates over the last quarter, highlights this in more detail.

Average standard annuity rate Age 65
£10K purchase price)
Average standard annuity rate Age 65
(£50K purchase price)
Q2 2014 £536 £2,886
Q3 2014 £521 £2,799
3-month change -2.7% -3%
Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying a standard level without guarantee annuity

Source: Moneyfacts Personal Pension and Annuity Trends Treasury Report. 27.10.2014

Standard annuity rates had initially been resilient following the Budget announcement, but unfortunately, they're now following the same path as enhanced annuities.

Richard Eagling, head of pensions at Moneyfacts, explains: "In what is proving to be a particularly testing time for the annuity market, providers have once again reverted to more cautious pricing strategies. A fall in annuity rates of the magnitude that we saw in Q3 2014 is unusual, but can be explained by two main factors: a significant recent reduction in gilt yields and the much lower demand for annuities post-Budget."

Enhanced annuities – still falling

Even though standard annuity rates saw the largest fall during the quarter, enhanced annuities also witnessed significant reductions. The average annual income payable from an enhanced annuity for a 65-year-old, based on a £10,000 pension pot, fell by 2.4%, and by 1.8% based on a £50,000 pension pot. The following table shows the typical income you could receive now, compared with the previous quarter.

Average Enhanced annuity rate Age 65
£10K purchase price)
Average Enhanced annuity rate Age 65
(£50K purchase price)
Q2 2014 £648 £3,413
Q3 2014 £632 £3,349
3-month change -2.4% -1.8%
Figures show gross annual annuity payable monthly in advance. Figures based on an annuitant aged 65 buying an enhanced level without guarantee annuity

Source: Moneyfacts Personal Pension and Annuity Trends Treasury Report. 27.10.2014

The Budget clearly has a lot to answer for. Despite smaller reductions this time round, it remains the case that enhanced annuity rates have been more severely impacted by the 2014 Budget than standard annuity rates. For example, the average annual income from a typical enhanced annuity for a 65-year-old (based on a £10,000 pension pot) has fallen by 3.8% since the Budget, compared with a 2.9% fall in income for the equivalent standard annuity.

It's a significant blow, as Richard Eagling concludes: "The pension proposals announced in the 2014 Budget by the Chancellor aimed to unleash greater freedoms in how retirees access their pension pots, but for those still looking for the security of an annuity they also seem to have inadvertently lowered the incomes payable."

What can you do?

Unfortunately, it means that those seeking standard annuities, as well as those with health conditions that warrant the higher income of an enhanced annuity, will get less from their pension pot than they would have done a year ago. The Budget announcement has completely transformed the pensions landscape, and it's had a major impact on the annuity market – the knock-on effect being that retirees could be left with a lower income.

But there are things you can do. The changes have made it more important than ever to shop around and compare every single annuity option before you make your final decision – don't automatically go for the rate your provider offers but instead head to the open market and see what else you can find, because it can make all the difference to your rate and, ultimately, your income. It's one of the biggest decisions you ever make as it determines the income you get for the rest of your life, so doesn't it make sense to choose wisely?

Making sure you get suitable advice is key, so speak to an independent financial adviser or head to our no obligation annuity planner to compare the options. Annuity rates may be falling, but if you choose wisely, you can still maximise your income for the comfortable retirement you're hoping for.

What next?

Try our online annuity planner

Read some of our retirement guides

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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