In a further blow to anyone hoping to secure a comfortable retirement, new research has revealed that annuity rates have fallen to an all time low.
The average rate for a man aged 65 purchasing a level without guarantee annuity (based on a £10,000 purchase price) has decreased by 3.3% since September, while the equivalent annuity for a woman has seen a 3.6% reduction.
However, the research from Investment, Life & Pensions shows these drops are small in comparison with the year-on-year fall in annuity rates. Since November 2008, rates for men have dropped by 10.8%, while the average annuity rate for a woman has decreased by 11%.
Even more staggering is the 15 year change in annuity rates. Moneyfacts data shows that the average annuity rate available to a man has plummeted by 45.4% since 1994, while the average rate for women has dropped by 42.4%.
Buying an annuity
Most people approaching retirement buy an annuity with the pension fund they have built up over their working life. The annuity then guarantees them an annual income, which they will receive every year up until they die.
The rate attached to the annuity purchased by an individual decides the level of income they will subsequently receive from it. Therefore, depending on the annuity rate available to a consumer when they choose to retire, the ‘real’ value of their pension pot may be seriously affected.
Different kinds of annuities offer different benefits and it is important that individuals choose an annuity that reflects their needs. For example, some annuities are index-linked while others pay out a level amount each year. Meanwhile, enhanced annuities are often suitable for people with medical conditions, or smokers.
Finding a competitive annuity rate
Which? money expert Martyn Saville said: ‘The continuing fall in annuity rates makes it more important than ever to shop around when buying an annuity. If you have a money purchase pension fund, you don’t have to buy an annuity from your pension fund provider when you retire – but, unfortunately, far too few people currently exercise the Open Market Option and shop around for the best deal.
‘If annuity rates stay low, you may even be better off not buying an annuity at all. There are alternatives, such as income drawdown, that you could consider.
‘Consulting an independent financial adviser is a key step. Spending a small amount of time and money now to get the best advice could earn you hundreds in extra income every year when you retire.’
For more information on annuities and how they work, read the annuities explained guide. The Which? guide to planning for your retirement also contains helpful advice that could help you prepare for the future.
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