Annuity rate decline revealedPension income falls 29% in three years

26 April 2013

Buying an annuity is 29% more expensive today than it was in 2009, according to new figures from Office for National Statistics (ONS).

To guarantee a pension income of £5,000 a year, a 65-year old man now needs a pension pot of £152,800, compared to £118,000 three years ago.

Annuity rates under pressure

Annuity rates have been falling for well over a decade. The average return from a pension pot at 65 was 15% in 1990, while today it is just over 5%. Long-term factors, such as increasing life expectancy are behind the trend but more recently low interest rates and falling gilt yields, exacerbated in part by quantitative easing, have speeded the downward slide. 

Pension costs rise  

Falling rates hit those who belong to defined contribution (money purchase) pension schemes, who buy an annuity to generate their retirement income. This type of scheme is now more common than defined benefit pensions, which offer guaranteed pension income. Auto-enrolment, which began last year, is expected to dramatically increase the number of defined contribution scheme members- most of whom will ultimately buy an annuity. 

The ONS figures show that to secure £5,000 a year, a 65 year old man would need to have saved up a pension pot of £152,800. They also reveal that most people have smaller sums put away for their retirement. The mean pension pot of those aged between 50 and 64 is £73,000, while the median is just £29,000. 

Comparing annuity offers 

The annuity market is served by a number of large providers, who compete for pension savers. Advisers stress the potential benefit of searching the market, rather than automatically accepting the rate you are offered by your pension provider. Shopping around is particularly important for anyone in ill-health. Enhanced annuities can pay up to 40% more than standard rates to those with reduced life expectancy and a significant increase for common conditions such as being overweight, a heavy smoker or having high blood pressure. 

Which? pension expert, Ian Robinson, says: 'Comparing annuity quotes can boost your pension income considerably. It is also crucial to make sure you buy the right sort of annuity. The ONS example gives figures for an index-linked escalating annuity that protects against inflation. A flat-rate annuity would pay far more for the same lump sum. 

'It is also important to work out whether you need a joint-life annuity to provide for your partner. This is less expensive than it sounds and is well worth considering for most couples. Taking independent advice will help with these decisions as well as giving a wide range of rates.'

More on this...

Annuities explained- how annuities work and what they offer

Defined contribution pension schemes- building a pension pot and buying an annuity 

The Which? Money Helpline- for your pension and annuity queries