Annuity Rates Show Largest Monthly Fall In 36 Months

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If you are depending on an annuity to boost your income when you retire, do not hold out too much hope because rates are still falling.

A new study shows that rates dropped the most in any month during the past three years in August.

Although annuity firms are suffering and would want to pull out all the stops to promote sales, those grey-suited actuaries behind the scenes are calling the tune and their figures are disappointing news for providers and potential investors.

In the past, pension savers had to buy an annuity before they reached their 75th birthday or faced tax penalties on their unspent pension pots.

Fortunately, new easy access pension rules scrapped this requirement and allow retirement savers to take their pension money from April 2015 and either spend or reinvest the cash how they wish.

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What annuities are paying

The research by financial web site Investment Life and independent finance web site Moneyfacts shows that a standard annuity will pay a retiree aged 65 with a £50,000 pension pot and average income of £2,797.

That’s 2.6% down on the figure for July 2014 of £2,874.

Since the beginning of 2014, annuity rates have dropped 3.2%. This gives retirement savers little reason to switch their cash into the investment contract and has injected doubts into the market that many providers will find hard to recover from.

Enhanced annuities, which are paid to investors with medical conditions, offer a slightly higher rate, but the research points out that although the drop has been only 1.3% in 2014, the falling rates have picked up over recent months.

An average enhanced annuity for a 65 year old with a £50,000 pension fund pays £3,344.

Why rates are so low

The research suggests two factors are pulling annuity rates down:

  • Government 15-year gilts are at their lowest rate since June 2013 thanks to quantitative easing. Annuity providers tend to invest in these safe bonds, and as their yields fall, so do annuity rates
  • Demand is falling for annuities due to the government’s easy access pension rules and investors are hedging their bets and waiting to April 2015 to make their financial decisions

“People are obviously looking at their options from April and rather than lock into an annuity now they are waiting to see if rates rise, new products come to the market or better investment options are available,” said a Moneyfacts spokesman.

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