Annuity rates fell by 3% between June 2011 to August 2011, according to new data from MGM Advantage, putting increasing pressure on consumers approaching retirement.
Annuity rates squeezed
The most recent slump in annuity rates is in response to the Bank of England’s quantitative easing. The new funds are used to buy government bonds (gilts), which pushes up their price and effectively reduces their long-term yield. Annuity providers, which use the same investments, are hit by falling yields and cut the rate they offer to those converting their pension pot. A more long-established drag on annuity rates is increased longevity (people living longer) and the lengthier period for which they are required to pay out. In 1990 the average rate for a man aged 65 was 15.5% but even before the latest fall in 2011, it was less then 7%.
Announcing the latest fall in annuity rates, MGM Advantage sales and marketing director, Aston Goodey, said: ‘These findings will put even more pressure on those people in or approaching retirement as they are faced with the reality of living longer, rising inflation and falling annuity rates.
‘The market volatility of recent months and weeks means the size of consumer pension pots have also fallen – giving this group of customers even less money with which to buy an annuity in order to generate an income for the rest of their life. Consumers really need to do their homework at this crucial stage of their life and that’s why simply drifting into an annuity with their existing pension company can be so financially damaging.
‘We predict this downward trend in annuity rates will continue, and there are no signs that inflation will go down significantly in the near future.’
Comparing annuity rates
At time of low annuity rates, it is more important than ever to shop around and compare rates. Which? pensions expert, Ian Robinson, said: ‘By searching the open market, many people can improve on the rate they are offered by their pension provider. This is particularly the case if they qualify for an enhanced annuity, due to ill-health or lifestyle factors. Professional advice can help to identify the best rate available and whether switching is worthwhile.’
Different types of annuity
As well as comparing rates, it is important that those about to retire consider the different types of annuity on offer. The MGM Advantage index tracks single life level annuities with no guarantee, for those age 65 with a pension pot of £50,000. Married couples might do better to choose a joint-life annuity and with inflation rates on the rise, many prefer to opt for an index-linked annuity, where the sum paid out increases each year.
Postponing your annuity
Although most people in defined contribution (DC) pension schemes buy an annuity on retirement, it is possible to leave your money invested and take a regular income through drawdown arrangements. It is also possible to take phased annuities, where some of your money is left invested and some used to buy an annuity or series of annuities. Drawdown is certainly an option for those with large pension pots, but it not suitable for the majority of pension savers.