Annuity incomes fall to historic low

Annuity rates are at their lowest point in the product’s history, with income payable falling by over 10% since the beginning of the year, research from Moneyfactscompare.co.uk reveals.

Analysis of data on the average annual pension annuity income shows that while it has been declining throughout 2019 there has been a rapid fall since August 2019 on the back of a sharp fall in gilt yields. This latest drop in annuity rates means that average annual annuity pension income is now 1.2% lower than its previous all-time low back in September 2016 for a £10,000 purchase price.

Moneyfactscompare.co.uk has looked at the average annual income payable on a single life standard level without guarantee annuity for a 65-year old and found that the income has fallen by between 12.3% and 12.5% (depending on the purchased price) since the start of the year. For an equivalent enhanced annuity, the reduction is between 10.2% and 11.4%.

Falling average annual pension annuity income since the start of 2019

Figures show gross annual annuity income payable monthly in advance. Figures based on an annuitant age 65 buying a single life level without guarantee annuity. 

Falling average annual pension annuity income since the start of 2019

Figures show gross annual annuity income payable monthly in advance. Figures based on an annuitant aged 65 buying a single life level without guarantee annuity. 

While the income offered from an annuity is at a historic low, an annuity still remains the only way for those in retirement to get a guaranteed income for life (on top of the state pension). An annuity is usually purchased at the start of retirement using money saved up into a pension pot. In 2015, new pension freedom laws were introduced that enabled retirees to have more control over what they did with their pension savings. This led to a decrease in reliance on annuities as a source of income during retirement, mainly due to the fact that individuals now have much more choice and freedom as to how they access their pension pots.

Richard Eagling, head of pensions at Moneyfactscompare.co.uk, said: “Although the demand for annuities has reduced substantially since the introduction of pension freedoms in 2015, it is still the only product capable of turning defined contribution pension savings into a guaranteed income for life.

“In the last few years, there has also been an increasing awareness of using annuities as part of a wider range of retirement solutions, typically to provide a baseline income from which to cover monthly living costs. As such, the security that annuities offer makes them an integral part of the retirement income landscape.

“However, the pricing trends at the time of annuitisation are critical to retirement income outcomes. Annuity rate risk, whereby individuals face the danger of locking into a low income at the time they retire, has always been a key retirement risk, but it has increasingly come to the fore again in recent months.

“Given the prevailing political and economic uncertainty, there are obvious merits in a retirement product that can guarantee a regular income for life – the question is whether current rates are still a price worth paying for the unique qualities that an annuity brings.”