Annuity rates looks set to plummet to record lows following significant falls in quarter two of this year, according to Moneyfacts.
During the period (April to June) the average income paid out on a standard annuity worth £10,000 for a healthy 65- year old fell by 4.1%, while an individual with a £50,000 pot would have got 3.8% less.
Annuities pay a fixed income that is guaranteed for life in exchange of a lump sum – either all or part of a pension pot. The reductions only effect people buying annuities now - those who already have an annuity will not see their income fall.
Since the start of the year, rates on enhanced annuities have suffered even bigger drops – by as much as 6.1% depending on the purchase price.
Enhanced annuities pay a higher income to individuals with habits such as smoking or health problems that could potentially reduce their life expectancy.
The drops – which Moneyfacts attributes to falling yields on the gilts used to fund annuities – mean the products are set for their worst year since 2014. Rates only briefly suffered greater falls during the months after the EU referendum in 2016.
Average quarterly pension fund growth and average quarterly annuity income change
|Calendar year||Average pension fund growth||Average annuity income change*|
*Average annuity income change based on a 65-year old purchasing a standard £10,000 level without guarantee annuity. Source: Moneyfacts UK Personal Pension Trends Treasury reports/Lipper.
However, the average pension fund was down 6.2% over the previous year, highlighting the risks associated with leaving pensions wholly invested.
By comparison individuals that opted to leave their pension savings invested and use a drawdown arrangement to get income have seen the value of their pot grow over the same period.
During Q2 of 2019, Moneyfacts says the average pension fund was up by 4.1% with gains since the start of the year reaching 11.2%.
Commenting on the findings, Richard Eagling, head of pensions at Moneyfacts says: "Trends in the annuity market were a mirror image of trends in the drawdown market in Q2 2019, with annual annuity income falling by 4.1% and the average pension fund gaining 4.1%.
"These figures show the extent to which different products in the same landscape can be prone to contrasting fortunes and illustrates the difficulties facing individuals when planning for their retirement.
"It also highlights how changing market conditions can lead to very different retirement outcomes for individuals with identical circumstances but retiring only a few years or even months apart."
This article was first written and published by our sister magazine Moneywise.