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Retirement incomes fall 10% in just one year

Retirement incomes fall 10% in just one year

Category: Annuities

Updated: 13/04/2016
First Published: 13/04/2016

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 It is now over 6 months old so the content may be out of date.

The recent reports of the rising popularity of annuities will no doubt come as welcome news, as it means that retirees are realising the importance of securing a guaranteed income. However, what won't be so welcome is the finding that the income received may not be as substantial as it once was, with our figures showing a sharp drop in retirement incomes in the past 12 months.

The figures – from the Moneyfacts Personal Pension and Annuity Trends Treasury Report, set to be released next week – reveal that the task facing individuals looking to secure a comfortable retirement income through their private pension has never been tougher, as just one year into the new pension freedoms landscape, incomes have significantly fallen.

In fact, the average retirement income for an individual who's turned their personal pension savings into an income through an annuity has fallen by almost 10% since April 2015, and as a result, has hit a record low level.

The calculations, based on an individual contributing £100 gross per month into an average personal pension fund over a 20-year period, show that they'd have built up a pension fund of £42,470 if they retired now at age 65, but that fund would have been worth £45,946 if they had retired a year ago (down 7.5%).

When the fall in annuity rates over the last year is also factored in, this equates to an average annual retirement income of just £1,983 – the lowest ever recorded – compared with the £2,191 they could have received if they'd annuitised a year ago, a drop of 9.4%.

This is the result of a combination of falling annuity rates and lower pension fund performance (the average pension fund has fallen by 2.3% over the last 12 months), with the average annual income payable from a standard annuity having fallen by 2% for someone with a £10,000 pension pot and by 3.4% for a £50,000 pot. This is just for standard annuities, too – enhanced rates have fallen even more dramatically, down by 5.7% and 6.3% respectively.

Essentially, this means that retirees looking for a secure income face the unenviable position of annuitising at all-time low rates, as Richard Eagling, head of Pensions at Moneyfacts, comments:

"A year into the new pension freedoms and the prospects of securing a comfortable retirement income for those making their own private pension provision look bleaker than ever. The continuing fall in annuity rates is particularly disappointing as annuity sales are starting to revive, so while pension freedoms have created more ways for individuals to access their pension pots, the real problem facing retirees is how to generate a suitable income.

"If anything, the new pension freedoms have proved counter-productive for retirees reluctant to take any risks with their pension pots as annuity providers have struggled to offer competitive pricing... As more individuals shift to private pension provision through defined contribution schemes the risks they face in achieving a decent retirement income are becoming clearer."

However, despite such a bleak outlook, the message remains the same: annuities are still the only way to secure a guaranteed income throughout retirement, with other possibilities (such as income drawdown or withdrawing your full pot and making your own investments) coming with the risk that you may run out of money in your lifetime.

As such, annuities will still be the preferred choice for many, but the fact that annuity rates are falling makes it more important than ever to shop around and make sure you find the best possible option. Our no-obligation annuity planning service can help, giving you the chance to compare available annuities to find the one that suits your needs and lifestyle, and in doing so, you'll hopefully be able to secure an income that comes in well above average.

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.