Annuity 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.