Annuity rates fall to record lows

Pension annuity rates have fallen by 45 per cent over the past 15 years, according to a new study released by Moneyfacts.

The decline in rates will be a blow to pensioners looking to secure a steady cashflow during retirement. Annuities are designed to offer individuals a fixed or variable stream of payments at a later point in time.

In spite of the recent recovery in the stock markets annuity rates remain low. Based on a £10,000 purchase price, the average monthly annuity rate for a 65-year-old male was £1,145 in November 1994. That figure has now dropped to just £625.

Compared with a year ago the average male annuity rate has fallen by over 10 per cent while female rates have dropped by 11 per cent.

Richard Eagling of Moneyfacts said: ”Given that the stock market recovery has recently boosted the size of many pension pots, it is disappointing that falling annuity rates have had an adverse impact on the retirement income that can be achieved.”

The fall in annuity rates are partly the result of low gilt yields.

“It’s purely a function of the yields that insurance companies get from government gilts and corporate bonds. To a lesser extent it’s also because we’re all living longer and that same pot of money has to be paid out for a longer period of time,” said Nigel Callaghan, pensions analyst at Hargreaves Lansdown.

However, he said the figures needed to be put into context, especially since economic circumstances have changed substantially compared with 15 years ago.

He said a 65-year-old male with £100,000 can still find a competitive annuity rate.

“Last year, there was about £12bn invested in annuities, which is a huge amount of money that’s likely to go up. One of the by-products of credit crunch was that people found the very boringness of annuities very appealing. All they had to do was give money to an insurance company and forget about it.”

The move towards more simplicity might also explain why annuities have not lost their attraction, despite falling rates.

“People understand that an annuity carries less risk. For the vast majority of those who have retired, they can’t afford to take on too much risk,” Mr Callaghan said.

Mr Eagling said consumers should continue shopping around for the best annuity price, citing that the “difference between the highest and lowest standard annuity rates can be as much as 13 per cent.”

Source: Investment Life & Pensions Moneyfacts