Annuity Rates fall to a record low

by Peter

Annuity rates have fallen by 20pc over the past three years to their lowest level ever, wiping £1,600 a year off the income from a £100,000 pension pot.
The fall means that people retiring now on occupational or private pensions can expect to receive a far lower income than their counterparts who retired just three years ago. People with final salary pensions are not affected.
Someone who has built up a pension pot worth £100,000 can now exchange it for an income of £6,201 a year, compared with £7,855 in August 2008, according to Hargreaves Lansdown, the stockbroker. This is a fall of £1,654 or 21pc.
The figures are for a 65-year-old man buying a pension that will not rise with inflation or pay an income to his wife should he die first. Rates on index-linked and “joint life” annuities have also fallen sharply.
“This is the lowest rate on conventional annuities since the modern annuity market became established in the 1980s,” said Tom McPhail, the head of pensions research at Hargreaves Lansdown. In 1990 the rate was as high as 15pc, he added.
Annuity rates: ‘There’s nothing stopping them getting lower’ 01 Sep 2011
Annuity rates have fallen because they are linked to the interest rates paid on government bonds or gilts. Gilt yields have fallen to record lows in recent weeks as investors sought a safe haven from the eurozone debt crisis, pushing prices up.
Mr McPhail said: “Annuity rates are at record low levels but there’s nothing to stop them going lower. Factors which could drive them down further include a Japan-style depression hitting the British economy and the introduction of equal annuity rates for men and women at the end of 2012.”
But he added: “Conversely, if the markets lose faith in [the Chancellor] George Osborne’s medicine, interest rates and therefore annuity rates could shoot up just as fast as they have come down.”

Glasses2Annuity rates have dropped to a record low, leaving thousands of retirees with an increasingly smaller amount to live off in retirement. Rates have dropped by 20% in the last three years alone, meaning that a typical £100,000 level annuitant is now £1,600 a year off worse off as a consequence. The fall in rates comes at a particularly unfortunate time as the country is also feeling the impact of high inflation, currently standing at 4.4%. The current prolonged high levels of inflation are eating into real spending power, at a time when retirement incomes are decreasing.

Retirement specialist Hargreaves Lansdown note that someone with a £100,000 pot would have got an annual income of £7,855 in the summer of 2008, but now would only receive £6,201 a year. This example relates to a level, single life annuity which pays an equal income amount until death. However, rates for annuities which are linked to the stock market have also dropped. Moreover the average UK pension pot of around £30,000 is nowhere near this illustrative level of £100,000, meaning the majority of DC pension savers will have to live in retirement on a much lower income than this.

Tom McPhail from Hargreaves Lansdown told the Daily Telegraph that…“…this is the lowest rate on conventional annuities since the modern annuity market became established in the 1980s.” He went on to add that the current rates were more than half what they were in 1990 at 15%. Although impacted by the increasing level of life expectancy, the main factor which affects rates for annuities is that of gilt yields (government bonds).  As these have become more popular due to the sovereign debt crisis in Europe, the price of government bonds has gone up, lessening the yield.

Mr McPhail warned that rates could drop even further if the UK economy were hit by a…”…Japan-style depression.” He did offer a caveat however, arguing that if interest rates were to be raised to cap possible further jumps in inflation, then annuity rates could increase again.

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