One of the most catastrophic effects of the financial crisis has been to send annuity rates into long-term collapse, with a disastrous impact on the potential income of many retirees. Experts say that annuity rates have been falling steadily for the past few years, largely as a result of increasing life expectancy, the move to gender neutral annuity prices and new capital rules called Solvency II, but the recent turmoil in the Eurozone has provided a further blow.
Because most people, when they retire, will buy an annuity – a regular income which will continue for the duration of their life – with their pension fund, falling rates have the potential to affect almost all of us.
There are several different types of annuity. The most common are conventional annuities which provide pensioners with a risk-free income in return for a lump sum that is guaranteed for as long as they live. Unfortunately for those contemplating imminent retirement, the sum paid out every year is directly dependent on the annuity rate available when you retire – meaning those currently making the switch from worker to pensioner could lose out.
It’s a real concern for those in their 60s, particularly when you look at the dramatic drop in rates. According to data from MGM Advance, annuity rates have fallen by 14% in the last three years and by 2% in the last quarter alone. A 65-year-old with a £50,000 pension would get an income of £3,129 today compared to £3,638 a decade ago.
But it could be dangerous to put off retiring for a year or two with the idea that rates might rise, because some experts believe that we will see annuity rates fall yet further. Regardless of the direction that the economy takes, EU ruling on gender discrimination that will prevent providers paying larger annuities to men coupled with Solvency II laws that will force providers to take fewer risks with their portfolios is likely to push rates down even more.
The longer-term picture is more positive, but if you’re retiring soon then it’s important to do your research well to make sure you get the best possible deal. Talk to providers about their latest annuity rates, compare prices between providers and follow annuity commentary on sites such as This Is Money. Thorough research will allow you to make an informed decision about what product to choose on your retirement.
