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12 Sep 2019

Annuity rates plummet: is a guaranteed pension income still worth it?

Find out why annuity rates are falling

Annuity rates have plummeted as much as 15% since the start of 2019, according to new findings from Hargreaves Lansdown.

The investment heavyweight has described the current annuity market as a 'horror show' for soon-to-be-retirees who have had their retirement income prospects hit the hardest.

Here we take a look at why annuity rates are falling and whether there's any point buying one.

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How annuities provide pension income

An annuity is an insurance product that allows you to exchange some or all of your pension savings for a regular income.

This income will either be guaranteed for a set period or the rest of your life, and the amount you earn depends on the rate an annuity provider offers you.

When offering you an annuity, an insurer takes into consideration your age, life expectancy and health.

Your money is pooled with other buyers of annuities and paid out to you until you die. People who live longer get a bigger share, and people who die sooner get a smaller share.

As a result, people with serious health problems are likely to be offered higher annuity rates than someone who's likely to live on for many years. Someone buying an annuity at age 75 is likely to get a higher rate than someone at age 65, because they will have less time to draw on their funds.

For more information about how annuities work, watch our short video below.

Annuity rates plummet

Annuity rates have fallen across all ages since the beginning of 2019. Younger retirees or those nearing retirement age have been hardest hit by the drop.

Currently, an average 65-year-old can buy an annual income of £4,654 using a £100,000 pension. This is down from £5,413 in January this year, a 14% drop.

A similar story was seen for those aged 60. At the start of the year, someone with a £100,000 pension could buy annual income of £4,776. This has dropped to £4,051 - a 15% decrease.

The table below shows how annuity rates across different age groups have been affected.

Income at the start of the year£4,776£5,413£6,099£7,055
Income now£4,051£4,654£5,443£6,419

Source: HL Annuity Index; single life, non-increasing annuity, guaranteed for 5 years and paid monthly.

The annuity rates decline is mainly being attributed to a fall in yields from Gilts, which are bonds issued by the UK government when it wants to raise money.

Amid uncertainty around Brexit and wider fears of a slowdown in global growth, investors have been moving away from company shares and bonds and flocking towards Gilts as a 'safe investment'.

This has driven up their price, causing their yield - the return that they pay - to tumble.

Should you buy guaranteed pension income?

Annuity rates are close to all-time lows, making them seem like an unattractive retirement income option at the moment.

But before deciding whether or not to buy an annuity, it's important to plan your retirement and work out exactly how much you'll need.

Annuities are great if you want the security of a guaranteed income that rises with inflation for the rest of your life.

Annuities are non-refundable, though, so there's no going back if you decide to buy one.

Nathan Long, senior analyst at Hargreaves Lansdown, emphasises the importance of evaluating all of the options for your retirement income before buying an annuity:

Anyone coming up to retirement needs to choose their options carefully. It's unlikely to be best to buy an annuity when you're still working, but when you finally retire permanently a combination of secure income to cover the essentials, and drawdown for the nice-to-haves, is a solid approach,' he said.

'For those who just cannot bring themselves to buy an annuity at these low levels, taking only the income produced by your pension investments is a sustainable way of drawing from your pension.

'There are plenty of funds available that can pay high income levels, but ensuring you have a spread of funds to provide income in retirement is sensible.

'Using tranches of your pension to buy annuities as you get older helps you to spread the risk of buying when annuity rates are low. You can benefit, as annuities generally pay more as you get older, and any health conditions that develop can be factored in, which can also boost the payouts.'

Finding the best annuity deal

It's essential to shop around to get the best annuity rate possible so that you don't miss out on a boost to your pension income.

An estimated £1bn in pension income is thrown away each year by people not shopping around. Comparing rates from different providers could boost your pension income by up to 20%.

However, there are far fewer providers offering annuities than there used to be.

For more information about how annuities work, check out our comprehensive guide to annuities.