Savers approaching retirement face a drop in the amount of pension income they can secure following a sharp decline in annuity rates this year.
The latest research by pension provider MGM Advantage found that conventional annuity rates fell by an average of 0.18 per cent in the three months between March 2011 and June 2011.
Income from enhanced annuities, which offer higher income to those in poorer health, fell more starkly, by 3.50 per cent over the same period.
Significantly, the difference between the best and worst conventional and enhanced annuity rates offered on the market was nearly 16 per cent to 18 per cent for men and women.
According to MGM’s quarterly Annuity Index, not buying the best annuity could mean £8,000-£10,000 less in retirement income over the lifetime of a £50,000 pension pot.
“These findings will put further pressure on those people in retirement as they are living longer with an ever diminishing pot of money,” says Craig Fazzini-Jones, drector at MGM Advantage.
“We anticipate that this trend is set to continue. Given this, the need to shop around for the best possible annuity rate is becoming ever more imperative.”
The survey also found that the real spending power of conventional annuities is being eroded by inflation, which is now more than double the official target of 2 per cent.
In June 2011, the average conventional annuity rate was just 1.04 per cent higher than the Retail Price Index (RPI), compared with 3.87 per cent in December 2009. For enhanced rates, the gap was 2.06 per cent and 5.30 per cent respectively.
“For someone with a pension pot of £50,000, the fall in annuity rates plus the rise in inflation means that they would receive £101.24 and £316.36 a year less if they were buying a conventional and enhanced annuity respectively,” said MGM.
Individuals on fixed incomes have a range of measures to protect their income against inflation, including Retail Price Linked or escalating annuities.
Since April this year, it has no longer been compulsory for individuals to buy an annuity at the age of 75, instead they can remain in income drawdown.
MGM’s calculations were based on a level annuities without a guarantee for males and females retiring at age 65 with a £50,000 pension pot.