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2016: the worst ever year for annuity income

2016: the worst ever year for annuity income

Category: Annuities

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Tomorrow marks Pensions Awareness Day (PAD), yet our latest research doesn't bode well for the sector – at least not for those seeking an annuity. Indeed, the data shows that annuity rates are on track for their biggest ever annual fall, which begs the question; is such a product still worth considering?

Record reductions

The figures show that, based on a typical standard level without guarantee annuity, the average annual income for a 65-year-old has fallen by 14.8% on a £10,000 purchase price and by 15% on a £50,000 purchase price so far this year. This means that someone who bought an annuity with a £10,000 pension pot would now get 14.8% less in income than if they'd purchased one at the end of 2015.

These are dramatic falls, and easily surpass the previous highest annual income fall of 11.5% recorded in 2012 (see the table below). Unfortunately, although there are more than three months of the year remaining, it's unlikely that the current economic situation will change too much in that time; as a result, it's unlikely that there'll be a strong enough recovery in annuity rates to avoid it being crowned the worst ever year.

Average Annual Change in Pension Annuity Income since 2006
(Figures based on a male aged 65 purchasing a standard level without guarantee annuity)
Calendar year Average annual change in annuity income
2006 1.3%
2007 4.4%
2008 -2.2%
2009 -8.7%
2010 -2.7%
2011 -8.4%
2012 -11.5%
2013 9.1%
2014 -5.7%
2015 -3.1%
2016 -14.8%
Source: Investment Life and Pensions Moneyfacts

"2016 has been a truly awful year for annuity rates, with rates falling to all-time lows," said Richard Eagling, head of Pensions at Moneyfacts. "This is particularly disappointing as the stock market volatility that we are experiencing has re-emphasised the importance of a secure lifetime income for many retirees.

"Unfortunately, record low gilt yields following the EU referendum result, the impact of Solvency II legislation and a significant weakening of competition in the annuity market have all exerted considerable downward pressure on annuity rates during 2016."

Should I turn my back on them?

While it may be tempting to turn your back on annuities – particularly given that the pension freedoms offer more choice than ever in how to spend your pot – it may not be the wise choice in the long run. Yes, annuity income may be falling, but that income is guaranteed for life, something that no other form of retirement income can provide.

Things like income drawdown can give you more control over your income, but there are clear risks involved, the biggest one being that you could end up having spent your entire pot when you've still got years of retirement left. This risk is only compounded by stock market volatility, as Richard pointed out (since with income drawdown your pension remains invested in the stock market, putting the funds at risk of devaluing), which makes having a secure income even more important.

It also highlights the importance of seeking professional advice when it comes to securing a retirement income. For many people, annuities could still be suitable, perhaps as part of a wider strategy to ensure that at least part of your retirement income is guaranteed. See if it could still be an option using our no obligation annuity planner.

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.