Annuities to pay almost £15k less than three years ago

In 2012, the average annual income for a 65 year-old man buying a standard annuity dropped by 11.7%.

Aston Goodey, distribution and marketing director at MGM Advantage comments:

“Annuity rates have fallen over the last year due to a number of factors including the historic low returns on UK gilts and the introduction of gender neutral pricing.  Improving longevity and Solvency II will continue to apply pressure on rates, and we expect a further period of uncertainly as the dust settles on the introduction of gender neutral prices.”

In January 2010, the average annuity for a 65-year old with a £50,000 pension pot would have paid an annual income of £3,495. Today that same pension pot would generate an annual income of £2,786, a reduction of 20%, or over an average retirement of 20 years, £14,180 less.

Goodey comments: “With annuity rates so low people will be wondering if they have any options. It is hugely important that you shop around for the best deal to make the most of your pension. You should consider all of the options available at retirement rather than be short-changed by your holding pension provider.

“For people willing to accept some risk, alternatives include investment-linked annuities, which offer starting incomes to match the best conventional rate. The returns required to sustain an income equivalent to the best conventional rate have now fallen to a mere 3% a year. In very simple terms if your investments return more than 3% you will receive more income in retirement than a conventional annuity and if returns are less then your income will be less. This has become a very popular solution for customers who now recognise the opportunities that these products present in the current economic environment.

“Other options include enhanced annuities, which take health and lifestyle into account, and can increase the annuity income by as much as 30% or more. With up to 70% of the population potentially qualifying for a better rate due to health or lifestyle factors, seeking financial advice is crucial to secure the best deal.”